Every October the Social Securty Administration announces the COLA (Cost of Living Adjustment) for the next 12 months starting in Dec. 2022.
Most people think it is based on the rate of change in the CPI (Consumer Price Index). But this is not the case. Here is why
There are actually two CPI indices: CPI-U and CPI-W. The most commonly known one is known as the CPI-U (Consumer Price Index for all Urban Consumers).
On July 13, the CPI-U rose 9.1% on a year-over-year (Y/Y) basis. You can see how fast it has been growing in the chart I have prepared below.
But this is not the index that the Social Security Index is based on. It is called the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers).
The good news for Social Security recipients is that lately, the CPI-W has been rising faster than the CPI-U. Look at the chart below for the past 6 months.
In June, the CPI-W was 9.8%, vs. the 9.1% rate of increase of the CPI-U. In fact, every month in the last 6 months, the CPI-W has been 0.6 percent points higher than the CPI-U.
How the COLA Rate is Calculated
The Social Security Administration (SSA) takes an average of the last 3 months' CPI-W year-over-year % increases, if any, ending in September. It uses this average to determine the COLA (Cost of Living Adjustment) increase to one-tenth of 1 percent.
For example, the last 3 months ending June have had an average CPI-W change in the past year of 9.3%. So if the SSA were to set the COLA using Q2 data rather than Q3 data the COLA would be 9.3%.
Last year for the 12 months starting in Dec. 2021, it was set at 5.9%. Now, depending on how fast inflation moves in the next 3 months ending September (i.e., the average of the CPI-W for July, Aug., and Sept.) will determine the Social Security COLA gain.
I project that inflation may have reached a peak, or at least by Aug. it will likely have peaked. But to be conservative, let's say that Q3 CPI-W figures are: 9.5%, 9.2%, and 8.7%.
That works out to an average of 9.1% (to the nearest 1/10th of one percent). The COLA will likely, therefore, be over 9.0% by the end of October.
The COLA rate is set as an average of CPI-W for Q3, and CPI-W at the end of Q2 was 9.8%. So, it will have to drop precipitously for the average to not exceed 9.0% by the end of Q3.
And if the CPI-W rate rises then falls, the COLA rate could be higher at 9.5%.
This will help wage earners and Social Security benefits recipients. The higher CPI-W rate vs. the CPI-U rate feeds through to the COLA increase.
However, Social Security benefits recipients also have to pay for increases in Medicare Part B premiums, which generally are deducted from the Social Security payments. This will lower the net increase in net Social Security benefits starting in Dec. 2022.
It's too early yet to know how much the Medicare Part B premium increase will lower the forecast Social Security increase.
Nevertheless, the numbers are getting set. On Aug. 10, the first of the 3 CPI-W figures used in an average to determine the COLA number will be released by the Bureau of Labor Statistics.
Usually, the CPI-W Y/Y rate gain is buried in the CPI-U announcement, near the end. So you can then start to track the first of the next three numbers used to average the COLA gain.
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