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Retirement Planning > Social Security

Social Security COLA Estimate Rises to 10.5% for 2023 as Inflation Accelerates in June

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What You Need to Know

  • The Consumer Price Index rose 9.1% in June over the past 12 months, the biggest increase since November 1981.
  • Mary Johnson of The Senior Citizens League warns that rising Social Security benefits can carry hidden costs.
  • The June data could force the Fed to act more aggressively and increase the risk of recession, a CIO says.

The consumer price index data for June, released Wednesday, shows that prices have risen by 9.1% over the past 12 months before a seasonal adjustment — the largest year-over-year increase since the period ending November 1981 — and 1.3% from May to June on a seasonally adjusted basis. May statistics showed prices rose by 8.6% over 12 months and 1% from April.

Based on this data, the Senior Citizens League estimates the Social Security cost-of-living adjustment, or COLA, for 2023 could be 10.5%, higher than the 8.6% it predicted last month. A 10.5% COLA would increase the average retiree benefit of $1,668 by $175.10, rounded, the advocacy group said this morning. It would be the biggest increase since 1981.

If inflation runs “hot” or higher than the recent average, the COLA could be 11.4%, according to the SCL, which added a forecasting range to its usual estimate. If inflation runs “cold” or lower than the recent average, the COLA could be 9.8%, according to the league.

Mary Johnson, the league’s Social Security and Medicare policy analyst, bases monthly COLA estimates on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers, known as the CPI-W. In June, the league pegged the 2023 COLA at 8.6%.

The Social Security Administration uses average inflation in the third quarter, based on the CPI-W, to calculate the benefit adjustment for the following year. The COLA was 5.9% in 2022, the highest in nearly four decades.

Inflation in June was broad-based, with the biggest price increases in gasoline, shelter and food, according to the Bureau of Labor Statistics. After rising 3.9% in May, the energy index climbed 7.5% in June and contributed nearly half of the overall increase, with the gasoline index rising 11.2%. 

The food index increased 1% June after a 1.2% gain the previous month. The food at home index also rose 1% in June, marking the sixth straight month with at least a 1% increase in that measure, according to the BLS.

The index for all items excluding food and energy rose 0.7% in June after increasing 0.6% in the preceding two months, the BLS reported. For the 12 months ended in June, inflation on items excluding food and energy increased 5.9%, slowing slightly from the 6.0% for the year ending in May.

The BLS stated that over the past 12 months the energy index rose 41.6%, the largest increase since the period ending in April 1980. Gasoline rose 59.9% over that period, the largest year-over-year increase since March 1980. The electricity and natural gas indexes saw the biggest 12-month price increases since the mid-2000s.

The food index gained 10.4% over the same period, the largest 12-month increase since the period ending in February 1981, the BLS said. 

Inflation’s Effect on 2023 COLA and Retirees

A new Senior Citizens League survey found that 71% of seniors ranked a cost-of-living adjustment that better protects Social Security benefits from inflation a top priority for Congress. The group collected 2,309 survey responses in May and June.

“A high COLA will be eagerly anticipated to address an ongoing shortfall in benefits that Social Security beneficiaries are experiencing in 2022 because inflation is higher than their 5.9% COLA,” said Johnson.

The previous month’s SLC survey found that more retirees had spent emergency savings, visited a food pantry or applied for SNAP benefits, or applied for assistance to help pay for essentials such as prescription drugs, medical care, rent and energy bills.

Hidden Costs of A Big Social Security COLA in 2023

While a high COLA helps retirees keep up with the cost of goods and services, there are consequences that boosted Social Security income can have that affects overall financial security, and the COLA doesn’t cover some key costs for retired and disabled Social Security recipients, Johnson noted. She explained that:

  • Increases in the Medicare Part B premium often outpace inflation and Social Security COLAs. In 2022, Part B premiums rose 14.5%, one of the biggest jumps in program history. “The Part B premium is automatically deducted from Social Security checks, and in 2022 beneficiaries are still smarting from this,” Johnson said.
  • Higher income from COLAs often leads to cuts in income-related benefits for low-income people, and higher taxes for those with incomes above $25,000 for individuals and $32,000 for married couples. This tax impact is not felt until tax time (starting in April 2023). “The Senior Citizens League believes tens of thousands of retirees who have not paid taxes on their benefits in the past may discover they must start doing so in 2023,” she said. “Because the income thresholds are not adjusted like ordinary tax brackets, these once-in-a lifetime COLA increases could lead to permanently higher taxes for many retirees.” 
  • Higher incomes could lead to a loss of income-adjusted Medicare health and prescription drug benefits for low-income beneficiaries, and higher-income recipients could wind up paying higher Medicare Part B and Part D premiums.

Market Reaction to Inflation and Rising CPI

The 9.1% increase exceeded the 8.8% median forecast from economists polled by Bloomberg, and comes as the Federal Reserve has been aggressively raising its benchmark interest rate in an effort to tame inflation sparked by several factors tied to the pandemic and Russia’s Ukraine invasion. The Fed last month raised its benchmark interest rate 75 basis points, its biggest hike in 28 years. 

Bloomberg reported that stock futures dropped and bond yields rose this morning after the higher-than-expected inflation report and cited expectations that the numbers mean the Fed will continue to aggressively raise interest rates this year. Swap markets indicate traders expect at least a 75-basis-point increase and possibly a full  percentage point hike in the Fed benchmark rate this month, according to Bloomberg.

The news service quoted Cliff Hodge, chief investment officer at Cornerstone Financial, as saying the “ugly” June CPI leaves the Fed no choice but to take a more aggressive path, “which raises the probability of recession next year.”

Earlier this week, Bloomberg reported that the latest survey of roughly 1,300 heads of households conducted by the Federal Reserve Bank of New York found that U.S. inflation expectations for the next three years fell to 3.6% in June from 3.9% in May, the largest decline since January. The three-year forecast peaked at 4.2% in October.

The one-year inflation outlook worsened, however, with median expectations rising to 6.8% last month – an all-time high for the nine-year-old survey — from 6.6% in May, according to the New York Fed’s June Survey of Consumer Expectations, Bloomberg reported.

Consumers also expect residential rents and food prices to keep rising sharply in the coming year and anticipate household incomes will increase by 3.2%, far below the expected inflation rate, according to the news service.

Some market watchers note the latest figures don’t take into account more recent price trends that could indicate cooling inflation.

‘Last Hot Month’ for Inflation?

David Kelly, chief global strategist at J.P. Morgan Asset Management, said in prepared comments Wednesday that the firm took the report “to reflect a good deal of lagged bad news — higher energy prices, labor costs and food prices — but we do expect lagged good news in the coming months, with energy prices diving lower, food prices cooling and consumer demand stepping back.”

“This should provide some inflation relief to the Fed and consumers, and hopefully lead sentiment to recover from its record-lows. The question remains, however, whether the Fed will exercise the patience for the lagged good news to flow through or race to stomp out demand before it does.”

J.P. Morgan sees “promising signs” that inflation will come off its highs this month, given recent oil and gas price drops. If the trend persists, June may be “the last hot month” for headline inflation, Kelly wrote. The firm maintained its expectation that the Fed will raise interest rates by another 75 basis points later this month.

 AAA reported that gasoline prices declined to $4.63 on average nationally today, down from a record high of roughly $5.02 set on June 14.

On Monday, Kelly noted other signs indicating cooling inflation, including data from indicating that domestic airfares appear to have declined in June and July. Indeed, the BLS said today that airline fares and lodging away from home were among the few major component indexes to decline in June.

LPL Financial, in its midyear outlook released Tuesday, before the latest CPI figures, predicted inflation most likely will remain significantly above the Fed’s long-term 2% target through year end, and that “inflation rates will likely cool throughout this year, but the cool down period will be long and slow. Some inflation pressures should subside as China adjusts its COVID-19 policy and supply chains improve. A slowing housing market could also eventually ease inflationary pressures later this year and into 2023.”

The BLS tweeted late Tuesday that a purported CPI release image circulating on Twitter was a fake.


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