A giant leap in Social Security payments is imminent

NEW YORK – Tens of millions of older Americans are on the verge of what could be the biggest pay rise of their lives.

On Thursday, the US government will announce what the percentage increase in monthly payments for Social Security beneficiaries will be in the coming year. It’s almost certain to be the biggest in four decades. It’s all part of an annual ritual in which Washington adjusts Social Security benefits to keep up with inflation, or at least a narrow measure of it.

Much controversy accompanies the move, known as a cost-of-living adjustment, or COLA. Critics say the data the government is using to set the increase doesn’t reflect what older Americans are actually spending and thus the inflation they’re actually feeling. The increase is also uniform, meaning beneficiaries receive the same increase regardless of where they live or the size of their nest egg.

Here’s a look at what’s happening:

WHAT IS THE BIG DEAL?

The US government is about to announce an increase in monthly benefits for its more than 65 million Social Security recipients. Some estimates suggest the increase could be as high as 9%.

WHAT DO BENEFICIARIES HAVE TO DO TO RECEIVE IT?

Nothing.

WILL THIS BE THE BIGGEST RISE EVER?

No, but it’s probably the strongest in 40 years, which is longer than the vast majority of Social Security recipients have received payments. In 1981 the increase was 11.2%.

WHEN DO THE BIGGER PAYMENTS START?

January. They are also permanent and they compound. This means that the following year’s percentage increase, whatever it ends up being, will be in addition to the new, larger payees after that last increase.

HOW BIG WAS THE INCREASE LAST YEAR?

5.9%, which was itself the largest in nearly four decades.

WHAT IS THE TYPICAL INCREASE?

It has averaged 2.3% since 2000 as inflation has remained remarkably contained despite all manner of economic swings. Indeed, in some of the toughest years in this stretch, the economy’s greater concern was that inflation was too low.

Since the 2008 financial crisis, the US government has announced zero increases in Social Security benefits three times due to weak inflation.

SO THE INCREASE IS TO COUNTER INFLATION?

That’s the intention. As Americans have become painfully aware over the past year, every dollar at the grocery store doesn’t fetch as much as it used to.

HAS SOCIAL SECURITY ALWAYS GAVE SUCH INCREASE?

no The first American to receive a monthly Social Security pension check, Ida May Fuller of Ludlow, Vermont, received the same monthly benefit of $22.54 for 10 years.

Automatic annual cost-of-living adjustments did not begin for Social Security until 1975, after a 1972 law made them mandatory.

HOW IS THE AMOUNT OF THE INCREASE DETERMINED?

It’s tied to a measure of inflation called the CPI-W Index, which tracks what prices are being paid by city wage earners and office workers.

More specifically, the rise is based on how much the CPI-W rises from one summer to the next.

IS THIS THE INFLATION MEASURE EVERYONE FOLLOWS?

no People generally pay more attention to a much broader measure of inflation, the CPI-U index, which covers all urban consumers. That covers 93% of the entire US population.

The CPI-W, on the other hand, only covers about 29% of the US population. It has been around longer than the CPI-U, which the government only began compiling after legislation that required annual increases in Social Security to be indexed to inflation.

IS THAT WEIRD?

Yes, and some critics have argued for years that Social Security should be switched to a different measure, one particularly tied to older people.

Another experimental index called the CPI-E aims to better reflect how Americans aged 62 and older spend their money. It has historically shown higher rates of inflation for older Americans than the CPI-U or CPI-W, but it has not caught on. Nor are other measures compiled by organizations outside of government hoping to show how inflation is specifically affecting older Americans.

Recently, the CPI-E showed somewhat milder inflation than either the CPI-W or the CPI-U.

WHY NOT USE ONE OF THESE OTHER INDEXES?

To calculate the CPI-E, the government relies on the same survey data used to measure the broad CPI-U. But there are relatively few older households in this dataset, meaning it may not be the most accurate.

All indices only give a rough approximation of what inflation really is. But the more pressing challenge may be that if the government switched to a different index that shows higher inflation for older Americans, Social Security would have to pay higher benefits.

That, in turn, would mean a faster drain on the Social Security trust fund, which at its current pace looks set to run dry in just over a decade.

HOW ARE THE LEVELS OF SOCIAL SECURITY BENEFITS DETERMINED?

Through a complicated formula that takes into account several factors, including how much a worker has earned over their 35 years of highest earnings. In general, those who made more money and those who waited longer to receive Social Security receive larger benefits up to a point.

This year, the maximum allowable benefit for someone who has retired at full retirement age is $3,345 per month.

WILL RICH PEOPLE GET THE SAME SOCIAL SECURITY BOOST?

Yes. Everyone gets the same percentage gain, whether they have millions of dollars in retirement savings or are just barely making ends meet.

IF THE INCREASE IS BASED ON INFLATION IN URBAN AREAS, WILL PEOPLE IN RURAL AREAS GET THE SAME BOOST?

Yes.

“The COLA doesn’t take into account where you live or your actual spending patterns,” said William Arnone, CEO of the National Academy of Social Insurance. “For some people, it’s an exaggeration of the cost of living for, say, small Midwestern towns versus urban areas like New York, DC, or Chicago. As many older people choose to live in suburban or rural areas, some will benefit more than others of the same size will increase.

IS THE INCREASE BAD NEWS FOR ANYONE?

It’s great news for all beneficiaries and for the businesses around them that could generate more sales.

But it also means the Social Security system pays out more, which can put an additional strain on its trust fund.

An inflation-driven year of big gains won’t drain the system by itself, but it’s been poised for an unsustainable future for a long time. The most recent annual Social Security Trustee Report says its trust funds, which pay out pension, survivor and disability benefits, will be able to pay scheduled benefits on time through 2035. After that, the income from taxes will be enough to pay 80% of planned benefits.

WILL THIS MAKE INFLATION HARDER?

It will set more money in the hands of the people who most of the time really need it, and they will most likely use it. That will add more fuel to the economy, which could keep upward pressure on inflation.

But the Social Security surge will have less of an impact on the economy than previous Washington stimulus packages, supply chain disruptions caused by global business shutdowns, or other factors that economists say are behind the worst inflation in decades.

IS EVERYTHING GOING TERRIBLE?

The risk of a recession appears to be growing by the day, but many economists expect inflation to ease as interest rate hikes take effect and supply chains continue to improve.

Economists at Deutsche Bank, for example, expect inflation to fall from 8.2% last August to 7.2% in the last three months of this year. In 2023, they see a decline to 3.9% in the second half of the year.

This is critical for many Social Security recipients. That would mean the COLA they will receive in the coming year would be greater than the inflation they are feeling right now. That would help offset the past year, when actual inflation far exceeded cost-of-living increases in January 2022.

Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, transcribed or redistributed without permission.

https://www.local10.com/news/politics/2022/10/12/explainer-a-huge-jump-in-social-security-payments-is-coming/ A giant leap in Social Security payments is imminent

Sarah Y. Kim

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