Is a brutal Social Security increase on the way? not necessarily | Smart Change: Personal Finance

(Keith Spetses)

Big, gigantic, huge, massive. Pick one of these adjectives, and you’ve probably seen it used to describe the upcoming Social Security Cost of Living (COLA) adjustment.

Some expected an increase of about 11%. If that happens, it will be the third highest rate of cola in history.

Is a massive Social Security increase really on the way? not necessarily.

Image source: Getty Images.

chicken count

You’ve no doubt heard the old expression not to count chickens before they hatch. The idea is that it is unwise to assume something will happen before it actually happens. While it may be tempting to rely on a huge Social Security COLA, there is no way to be certain yet of the scale of the increase.

Yes, COLA aims to help keep Social Security benefits from eroding inflation. And yes, inflation so far in 2022 has been at levels not seen in four decades. Does this mean your COLA will automatically be higher than it has been in nearly 40 years? Unfortunately no.

The reason is that COLA does not calculate inflation rates throughout the year. Only the averages for the third quarter of the current year and the previous year are used. Also, the metric used to determine Social Security increases—the Consumer Price Index for urban wage earners and clerical workers, or CPI-W—differs slightly from the metric often used to measure inflation (the Consumer Price Index for all urban consumers, or CPI-U).

Of course, no one knows what the average CPI-W will be for the third quarter of 2022 because the quarter isn’t over yet. We don’t even know what the August CPI was at this point. The Bureau of Labor Statistics will not release the data until September 13.

change in the air

Sure enough, if inflation (as measured by CPI-W) is as high in the third quarter as it was during the first seven months of this year, your Social Security COLA will be too big. It’s unlikely to be around 11%, but there could be a 9% pitch increase in this scenario.

However, there are several signs that inflation may indeed be trending lower. For one thing, the Consumer Price Index (CPI-W) for July is slightly below the level recorded in June. More importantly, two of the main drivers of rising inflation appear to have lost some steam.

Gas prices have decreased significantly over the past two months. On June 14, 2022, the average price of unleaded gasoline in the United States was $5.02 per gallon. As of September 8, the national average was $3.75 a gallon, according to the AAA. This is a 25% reduction. Some experts predict that gas prices may continue to fall.

Transportation costs affect the cost of many products, especially food. With lower gas prices, prices for other commodities are likely to fall as well.

In July, home prices fell from the previous month for the first time in three years. The decline was the largest since 2011. It seems likely that this trend will continue. Fannie MaeThe latest national housing survey by the World Health Organization found that the number of Americans expecting lower home prices rose in August.

Less than some expect – but still important

We won’t know what the actual COLA agreement will be until mid-October. However, there seems to be a good chance of increasing your Social Security It will be less than many expect.

Even with inflation likely to decline in the third quarter, the average CPI-W may still be much higher than in the prior year period. Whether you call it a big raise or not, the in-store Social Security recipient for a COLA is almost certainly much larger than it has been in a long time.

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Keith Spetses He has no position in any of the mentioned shares. The Motley Fool does not have a position in any of the stocks mentioned. Motley Fool has a profile Disclosure Policy.

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