The Social Security Administration announced an annual cost of living adjustment of 8.7% amid a rising inflation rate that has been punishing for Americans on fixed incomes.
The adjustment represents the largest one-time increase since 1981, and the largest experienced by beneficiaries alive today. The increase that took effect this year was 5.9%.
The increase will begin with benefits payable to more than 65 million Social Security beneficiaries in January 2023. Increased payments to more than 7 million Supplemental Security Income beneficiaries will begin Dec. 30, 2022, the agency said.
Thanks to an unusual quirk, Social Security beneficiaries can expect to realize the full cost of living adjustment increase. In previous years, the annual adjustment was eaten up by increases in the cost of Medicare Part B, the unit of Medicare that pays for doctor and hospital outpatient services.
But Medicare premiums are set to decrease in 2023, from $170 to $164.90, because of a large increase last year tied to a new calculation in the cost of an Alzheimer’s treatment. By comparison, last year's $92 overall Social Security COLA increase was diminished by a $21 increase in Medicare Part B.
"Medicare premiums are going down and Social Security benefits are going up in 2023, which will give seniors more peace of mind and breathing room," acting Social Security Administration Commissioner Kilolo Kijakazi said in a release.
"This year’s substantial Social Security cost-of-living adjustment is the first time in over a decade that Medicare premiums are not rising and shows that we can provide more support to older Americans who count on the benefits they have earned.”
The annual adjustment is calculated by averaging inflation readings among urban wage earners and clerical workers from July, August and September. Annual inflation readings in those months came in at approximately 8.5%, 8.3%, and 8.2%.
Despite the expected increase, the methodology the SSA uses to calculate the annual adjustment could still leave most older people financially vulnerable, according to Mary Johnson, policy analyst and editor at the Senior Citizens League. That's because the strategy puts too much emphasis on gasoline and transportation costs, she said — items that retirees spend less money on compared with food, health care and housing. Johnson has estimated that the average retiree benefit of $1,656 per month is short about $43.80 per month on average, and by a total of $417.60 year to date, given relevant inflation data. For 2022, the year-on-year inflation rate among urban wage earners and clerical workers has averaged 9%.
"Indications are that the COLA will not reflect pockets of persistently high inflation affecting retired and disabled Social Security recipients," Johnson wrote in a recent note. "That puts tens of millions of retirees at risk of continuing to fall behind."
David Certner, legislative counsel at AARP, told NBC News that for many individuals social security is the only source of income they have that actively responds to inflation. He noted previous attempts to reduce the magnitude of the COLA have failed.
"This is a pretty big increase for most people," he said. "It will be welcome news given the current environment."
The Federal Reserve has acknowledged the pain inflation inflicts upon on individuals who receive Social Security benefits.
"Everyone — particularly people on fixed incomes and at the lower part of the income distribution — are better off with stable prices," Fed Chair Jerome Powell said in a speech in May. "And so we need to do everything we can to restore stable prices. We’ll do it as quickly and effectively as we can."
The Fed has sought to address inflation through a series of interest rate hikes to cool off demand in the economy.
Johnson wrote that retirees and people on fixed incomes have indicated they have been spending down their savings to keep up with price increases, leaving them financially vulnerable. And the expected cost of living adjustment could still be inadequate.
"The lifeboat is leaking and taking on water, leaving older Americans at risk of financial drowning," Johnson wrote.