Here’s why the recent social security crisis might not be good news

Earlier this month, the Social Security Administration (SSA) announced an 8.7% increase in benefits for 2023. On the surface, this seems like great news given how badly inflation has impacted purchasing power, especially for our most vulnerable population.

I’m not here to take the wind out of anyone’s sails. I think it’s a good thing that the SSA is increasing benefits. However, I was a little less excited about the underlying effects of the increase. Let’s examine why.

Person nervously looking into the distance.

Image source: Getty Images.

Large COLAs occur when inflation rises

It is important to understand why the SSA introduces cost of living adjustments (COLAs). These annual benefit changes are designed to protect a senior’s purchasing power from inflation.

The SSA compares CPI-W data from the third quarter of this year to the third quarter of last year to calculate the percentage increase. While a large increase in benefits may feel like a gift, it only occurs when your spending power is eroding at an alarming rate.

It’s great that the SSA is acknowledging this, but it’s important to understand that COLA’s do not add purchasing power to seniors. They simply aim to protect them from losing it.

The increase might not be enough

This leads me to my second point, which is that this latest COLA may not even achieve its primary goal of protecting purchasing power. While inflation has been rising steadily throughout the year, there was even a slight fall in August.

Blocks of wood representing the cost of living.

Image source: Getty Images.

Pundits were initially bullish on this, but the enthusiasm was relatively short-lived as it appears the inflation slowdown has more to do with a temporary slowdown in gas prices than a broader slowdown in prices.

It is unfortunate that this decline occurred in the third quarter as this is the only quarter the SSA is looking at to determine the next COLA. In other words, inflation could still be accelerating, but having temporarily cooled in August, Social Security’s 2023 COLA is likely to lag true inflation.

This is according to the Federal Reserve’s comments at the September Federal Open Market Committee (FOMC) meeting: “The war [in Ukraine] and related events are creating additional upward pressure on inflation and weighing on global economic activity.”

If inflation continues to rise as the Federal Reserve expects, the purchasing power of Social Security beneficiaries could fall despite the 8.7% COLA.

This bump puts more pressure on Social Security’s ability to pay

Finally, the recent COLA could have an adverse impact on the future of the Social Security program. When the SSA receives more revenue than is needed to pay the current year’s benefits, it puts the extra money into two trust funds that invest in government bonds to increase the program’s reserves. In June, the SSA released its annual status report on the program’s trust funds. The report said the program is facing “long-term funding constraints” and the trust funds only have enough at this point to deliver services through 2034.

This report was released well before the 2023 COLA announcement, so it’s possible that the bankruptcy date could come even earlier now.

As interest rates rise, the investments in the trust will yield higher returns that could offset the COLA. However, recent comments from the Committee on Good Federal Budgeting, a non-profit public policy organization in DC, are far from optimistic:

This very large COLA increase should bring the year of bankruptcy forward by a full year. It’s just another reminder that delaying the correction of these imbalances makes people who depend on Social Security particularly vulnerable to further deterioration in their finances.

It’s not all darkness and doom

At the heart of every COLA is one problem: inflation. And if inflation continues to rise, the overall purchasing power of Social Security beneficiaries will decline in the coming year.

Recent comments from the US Federal Reserve offer hope that a good deal of the inflationary pressure stems from relatively short-term events – the war in Ukraine and the COVID-19 pandemic.

If the supply chain challenges arising from these events are resolved in the near future, which is entirely possible, we could see inflation fall dramatically. This would bring some much-needed relief to Social Security recipients.

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