Next year’s Social Security cost-of-living adjustment could be less than half this year’s COLA

The trustees consider potential cost-of-living adjustments as part of their overall actuarial analysis of the solvency of Social Security. Increased benefits result in higher long-term costs for the program, but, at the same time, they foresee an easing of inflation by late summer.

It’s still early in the year to know how this will pan out, and we won’t know the actual magnitude of the COLA until the fall. It is alarming news nonetheless. Inflation usually hits seniors harder than everyone else, partly because of a clever trick in how Social Security calculates it.

Social Security currently pays out about $112 billion a month to 67 million Americans, and is the mainstay of most older Americans’ incomes.

The latest official inflation figures showed consumers’ costs rose 0.4% from January to February, which works out at an annual rate of 4.9%. But seniors are paying more than that. Uncle Sam says that the “CPI-E,” the consumer-price index for the elderly, was up 0.6% last month — with an annual rate of 7.5%.

So why would next year’s cost-of-living adjustment be only 3.3%? It will be based on the regular CPI — not the elderly-specific index — in July, August and September of this year, and how much it has changed from the same figures a year earlier. So it’s effectively how much consumer prices have changed from one summer to the next.

The Social Security Administration, like much of Washington, seems to be expecting inflation to collapse in short order. We shall see.

The key thing about Social Security’s COLAs is that they are paid a year in arrears. Prices rose 5.9% in 2021, so seniors got a 5.9% hike in their benefits in 2022. Prices rose another 8.7% in 2022, so they got an 8.7% bump in monthly benefits this year.

This is great for the Social Security Administration, and by extension the federal government, which borrows from it. Wages tend to rise in line with inflation in real time, meaning the program’s revenues get an immediate boost from inflation, while the benefits — and therefore the program’s costs — remain behind the eight ball. When inflation surges, as it has in recent years, that’s especially bad news for seniors.

So, over the past five years, from January 2018 through December 2022, government data show that the average senior’s expenses — as measured by the CPI-E — rose 20%. But benefits during that time rose just 12%. In real, spending-power terms, by the end of 2022 they were getting 8% less per month than they had been at the start of 2018.

Meanwhile, the new annual trustees report shows the program’s financial woes deepened last year, and the 75-year hole in the accounts widened by 10% to $22.4 trillion. The government will have to find money to fill that hole, either by cutting benefits or raising taxes.

For context, that works out to 1.2% of annual gross domestic product per year over the next 75 years. Total federal taxes currently average around 19% of GDP, so a 1.2-point hike to fill in the Social Security gap would be substantial.

Among the many reasons for the hole is that the maximum income limit on which Social Security taxes are paid hasn’t kept up with average incomes. That amount jumped 9% in 2023, to $160,200. In 1983, when Ronald Reagan and House Speaker Tip O’Neill struck their famous deal to shore up the program, they expected Social Security taxes on apply to 90% of earned incomes. But today it applies to about 82%, because incomes above the limit have risen by far more than those for everyone else.

When he was running for president, Joe Biden said he wanted to start applying Social Security taxes on incomes over $400,000. But with the House of Representatives now in the hands of the opposition Republicans, he didn’t even include the idea in this latest budget.

Read on: Biden vows he’ll turn Republicans’ dreams for Social Security and Medicare into a nightmare