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What you need to know about the new Social Security benefit increase

By Hannah Grabenstein

For the 70 million Americans who receive Social Security, experts say the significant increase in benefits slated for 2023 is much-anticipated and much-welcomed.

Social Security recipients, most of whom are over age 65, have seen their payments increase almost every year for more than four decades to keep up with the cost of inflation. When inflation is low as it's been over the past decade or so those cost-of-living adjustments, or COLAs, have been fairly mild. But last year, the increase was big, and this year it's even bigger.

To help cover the rising cost of food, housing, health care and other essentials, the Social Security Administration announced Thursday that beneficiaries would receive an 8.7-percent increase in their monthly payments. In a sign that the Federal Reserve's efforts have not yet worked to puncture the elevated inflation rate, the Bureau of Labor Statistics also released its consumer price index for September on Thursday, showing prices rose 8.2 percent over the last year.

The COLA for 2023 is the largest increase since 1981 - when inflation was even higher than it is today - and is the fourth-largest jump ever.

Here's a look at how the new COLA was calculated, how it will impact individuals receiving Social Security benefits and what problems those people might still face.

How is COLA calculated?

The cost-of-living increase is purely a mathematical formula - though it wasn't always that way, said National Academy of Social Insurance CEO William Arnone.

Social Security was established in the 1930s, but Congress first increased Social Security payments in 1950, and continued to do so every few years for more than two decades, according to the SSA. In 1972, President Richard Nixon signed a rule into law that the yearly increase be tied to consumer prices.

Since then, the Bureau of Labor Statistics compares the average consumer price index for workers for July, August and September of the current year to the average number for the previous year. That percent change then becomes the annual increase in Social Security payments, according to the Social Security Administration. COLAs can't be negative; if there's a decrease in the percent change, there will be no COLA.

Inflation had already started to creep up by the end of 2020, which is why payments jumped 5.9 percent in 2021. As prices soared in 2022, a large cost-of-living adjustment was expected before it was confirmed Thursday.

How will the Social Security increase help people?

The impact could be enormous, experts say. The average retired person will see a monthly increase of around $144 in payments, according to the SSA, and the average monthly payment to a retired beneficiary will be $1,827.

The more than 70 million Americans who receive Social Security payments, Supplemental Security Income payments or both will start to see that increase beginning in either December or January.

According to the SSA, 55 percent of Social Security recipients in 2021 were women. And though the vast majority of those Americans are retired, around 3 million children also receive Social Security payments. Others who get payments include people with disabilities and people who have lost spouses.

The estimated average payment for a widow with two children will jump from $3,238 to $3,520, according to the SSA, and the average payment for disabled workers will increase from $1,364 to $1,483.

Another important change will be the decrease in Medicare Part B premiums, said Mary Johnson, Social Security and Medicare policy analyst at the Senior Citizens League.

"We have not seen that combination ever, and this may be the one and only time we ever see it," Johnson said. "So I'm encouraging everybody to appreciate it."

Many people expect their Medicare premiums to eat up a substantial portion of their COLA, but that won't be the case this year, Johnson said.

People who are low-income are still going to struggle with high prices, she said, and the cost-of-living increase won't completely alleviate that. But the staggering jump in payments will definitely help people, she added, especially as the cost of heating increases and winter approaches.

"I'm encouraging people to contact their local family services department [and] Medicaid offices to find out about low-income heating and fuel assistance programs and to apply for those now. This is the time of year to do so," she said.

Why the adjustment isn't a perfect solution to seniors' rising costs

It's not clear right now whether higher Social Security payments will contribute to spiraling inflation. But Arnone said that older people are much more likely to spend money than save it, giving his organization a "clear sense that it will help mitigate a recession."

Every month this year, the cost of inflation has far exceeded the 5.9 percent cost-of-living increase that was set at the end of 2021, Johnson said. That means last year's COLA is not meeting the current economic strains.

Social Security benefits are a one-size-fits-all solution, but people's real needs vary across geography, race, age and other population differences, Arnone said. Older people tend to be more heavily impacted by inflation than younger people.

"They have a tendency to need to pay for things that are in higher inflation categories, health care being the No. 1 example," Arnone said. The cost of eye care, for example, spiked 3.2 percent from August to September, the largest increase on record, according to the Associated Press.

One downside to the way the COLA is calculated is that it's based on the consumer price index for workers, Arnone said, which doesn't always reflect how older people spend their money.

He pointed to the Elder Index, a research project from the Gerontology Institute at the University of Massachusetts Boston, as a potentially more accurate measure of how older people struggle financially with housing, transportation, health care and food costs. But while the index is "gaining traction," he said, "it's all hypothetical at this point."

https://www.pbs.org/newshour/economy/why-your-social-security-check-will-get-a-big-boost-next-year