A Social Security cost-of-living adjustment of 8.7% for 2023 means beneficiaries will receive an extra $140 per month beginning in January.
According to new research from the Bank of America Institute, spending is increasing faster among older generations who receive Social Security benefits.
According to the Bank of America Institute, for the week ending Feb. 18, individuals born in 1964 or before had household spending that increased between 4% and 6% year over year, compared to 2% for all ages.
The institute is a think tank within the bank that evaluates consumer trends using the firm’s internal proprietary data. According to the company, Bank of America serves approximately 67 million customers, or roughly one in every two households.
According to Bank of America debit and credit card data, older generations spent at a similar rate to other generations for the majority of 2022. However, spending growth for older generations has exceeded the average since late November, according to the research.
According to the Bank of America Institute, the Social Security cost-of-living adjustment, or COLA, may have increased spending growth by up to 3 percentage points for older generations.
A Social Security cost-of-living adjustment of 8.7% for 2023 means beneficiaries will receive an extra $140 per month beginning in January.(Photo: PBS)
The Social Security COLA for 2023 was the largest increase in monthly checks for beneficiaries in four decades.
Approximately 70 million people receive Social Security or Supplemental Security Income payments. Recipients include not only retirees, but also disabled people and beneficiaries’ family members.
While the Social Security COLA for this year may help beneficiaries with their budgets, the increase for next year may be less substantial.
Here are three important things to remember.
1. For retirees, inflation has been “extremely difficult.”
While Social Security benefits are adjusted for inflation, there is a time lag before the changes take effect.
While the 2022 COLA adjustment was 5.9%, government inflation data revealed that costs increased at a faster rate for much of last year. Now, the 8.7% COLA for 2023 is outpacing current inflation, with a 5.8% increase in the consumer price index for urban wage earners and clerical workers, or CPI-W, over the previous 12 months. The Social Security Administration calculates the annual COLA adjustment using the CPI-W.
According to the institute, older generations spent less during the pandemic than younger generations.
“The average retiree has found it extremely difficult to live with these high rates of inflation,” said David Tinsley, senior economist at Bank of America Institute.
Increased costs, such as food, rent, or utility bills, have been particularly burdensome for low-income and older generation households, according to Tinsley.
“What this cost-of-living increase has done is given them some breathing room to increase their spending,” he explained. “However, I don’t think anyone would pretend they aren’t still under a lot of pressure.”
According to ongoing surveys conducted by The Senior Citizens League, a nonpartisan senior organization, the proportion of respondents carrying credit card debt for more than 90 days increased to 44% in the first quarter of 2022, up from 35% in the third quarter of 2022.
“Theoretically, they should be [catching up], but it’s not that simple,” said Mary Johnson, Senior Citizens League’s Social Security and Medicare policy analyst.
2. The Social Security COLA for 2024 could be significantly lower.
According to the league, the Social Security COLA for 2024 will most likely be much lower than this year’s 8.7% due to cooling inflation.
“Right now, it appears that the COLA for 2024 could fall below 3%, and frankly, if this trend continues, it could fall to 2% or less,” Johnson said.
The Social Security Administration calculates the annual cost-of-living adjustment by comparing the average for the third quarter of the current year to the average for the third quarter of the previous year.
A COLA in 2024 would imply that inflation is higher than it was the previous year, according to Johnson.
Instead, she predicts a very small COLA or no COLA at all for next year.
“If we get any [COLA], it simply means that inflation is slowing,” Johnson explained.
3. The Social Security COLA for this year may have an impact on inflation.
Higher spending as a result of the current 8.7% Social Security COLA may complicate efforts to reduce inflation.
In the face of high inflation, a more generous Social Security COLA — and similar pension adjustments — encourages people to resume old purchasing patterns, according to Peter C. Earle, an economist at the American Institute for Economic Research.
This comes as the Federal Reserve attempts to control inflation by raising interest rates.
“That is another factor complicating the Fed’s efforts,” Earle said of increased COLA spending.
When it meets this week, the central bank is expected to raise interest rates by a quarter point.
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