What's behind the big Social Security cost-of-living bump 

Social Security recipients will be getting their biggest raise in decades to help keep pace with inflation.

Mary Johnson, who has been tracking the annual cost-of-living adjustment (COLA) for 28 years as Social Security and Medicare policy analyst at The Senior Citizens League, a nonpartisan advocacy group based in Alexandria, Virginia, provided details:

When will the Social Security Administration announce its cost-of-living increase?

On Thursday, the SSA announced the size of the increase. The release coincides with publication of consumer price data for September. The third-quarter inflation figure (for July, August and September) is then compared to the figure from the third quarter of 2021 to formulate the increase.

How big is the COLA?

Social Security recipients will get an 8.7% increase in 2023, the agency said. The COLA also covers recipients of Supplemental Social Security, designed to help aged, blind, and disabled people with little or no income. For the average Social Security recipient currently getting retirement benefits of $1,660 per month, an 8.7% increase amounts to an additional $144.40. Those receiving the maximum monthly benefit — $3,345 for those who started receiving payments at full retirement age — would get an additional $291. 

When will Social Security recipients see the increase?

In their January check or direct deposit.

Will the increase be sufficient for retirees to keep up with inflation?

We can't say how adequate it will be until we know how hot inflation is running in 2023, Johnson said.

Is this the largest increase in the history of Social Security?

It is the largest in dollar terms because benefits have grown over the years, but in the inflationary period of 1979 to 1981, the percentage increases were even higher. In 1980, for instance, the COLA was a whopping 14.3%. 

Which version of the Consumer Price Index is used to formulate the COLA?

The SSA uses a subset of the CPI data known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.

Why the CPI-W?

In 1973, Congress amended the Social Security act to include automatic annual inflation adjustments. The CPI-W was chosen as the benchmark.

Does the CPI-W do a good job of tracking inflation for retirees?

This CPI-W doesn't reflect spending patterns of older, retired adults, according to advocates for senior citizens, who are calling for a more appropriate index. The CPI-W mirrors the spending of younger, working adults, not retirees. For instance, it assumes 7% of spending goes to health care, when studies indicate that older adults devote from 25% to 33% of their incomes to health care, Johnson said.

Will the inflation adjustment apply to recipients of disability benefits and other Social Security programs?

Yes.

How many people overall received benefits in 2021?

Seventy million people received benefits, according to the Social Security Administration.

Will the deduction for Medicare Part B eat into the record inflation adjustment for 2023?

Retirees' charges for Medicare Part B are typically subtracted directly from Social Security benefits. Though Medicare charges typically rise year to year, the standard monthly Part B premium will be going down by $5.20 to $164.90 in 2023. "This is what makes this such an unusual year," Johnson said.

Could the big inflation adjustment put the Social Security program in financial peril?

It could erode program financing and advance insolvency estimates, Johnson said. Forecasts call for Social Security to run out of money in 2035 based on a COLA of 3%. A recession and an attendant decline in payroll taxes also would put a dent in Social Security financing.

In periods of deflation, is there a negative COLA? 

The benefit is not reduced, but in periods of recession, such as 2010 and 2011, there was a zero COLA.