It’s official – more or less. By the time you read this on the AgingOptions Blog, the officials at Social Security will almost certainly have announced the largest cost-of-living adjustment (commonly called the COLA) in four decades. The actual announcement is due the day after this article was scheduled to be posted on the Blog, but the expert consensus is that Social Security beneficiaries will see a whopping 8.7 percent COLA come January 2023.

To gain some insight into what this means, we’re taking a look at this article that recently appeared on The Hill, a popular political website. Reporter Gianna Melillo examined the process of determining the annual cost-of-living adjustment which, directly or indirectly, affects about 20 percent of all U.S. households. But will the COLA really help retirees overcome the pressures of inflation? Let’s take a look.

Experts Say an 8.7 Percent COLA is Likely

“The Social Security Administration is expected to announce its largest cost-of-living adjustment (COLA) to Social Security in four decades on Thursday [October 13],” Melillo writes, “a move that could leave people living on the program with more income to deal with inflation. It is expected that the hike will be 8.7 percent, a boost to the more than 70 million Americans benefitting from the program.”

Earlier this fall, speculation was running rampant that the COLA hike could top 9 or even 10 percent, but that was before all the inflation figures for the third calendar quarter were in. Now that September’s inflation rate can be closely estimated, the consensus is that an 8.7 percent hike will show up in the benefits of retirees, widowers, and those who are disabled, starting with their 2023 payments.

How to Estimate Your Increase

Social Security was designed to replace 40 percent of pre-retirement income, experts say. However, benefits vary widely based on lifetime earnings and the age at which a person starts drawing those benefits. “On average,” says The Hill, “retirees now receive a monthly benefit of $1,656. The new COLA adjustment would increase that total by $144.10, according to the Senior Citizens League, a bipartisan advocacy group.”

A quick shorthand: you can estimate your own increase simply by multiplying your gross benefit amount by 0.087. A $2,000 per month beneficiary will see an extra $174 in gross Social Security income under the new COLA estimates.

Social Security Affects 20 Percent of Household Budgets

Social Security’s impact is hard to over-estimate. “ Around 25 percent of Americans receive Social Security,” Melillo writes, “and 1 in 5 U.S. household budgets will be affected by the COLA spike, meaning it could have a significant impact on the economy as a whole. And for people depending on Social Security every month, it will especially be important.”

The reason for that importance is simple, as we pointed out in this AgingOptions Blog article just last week. In the article, we quoted research from GOBankingRates revealing that 51 percent of retirees said they plan to depend on Social Security to fund more than half (31 percent) or all (20 percent) of their retirement. The 2023 COLA boost comes at a critical time, as inflation squeezes Americans’ budgets.

A COLA of This Magnitude is a Rare Event

If you think a Social Security hike of this magnitude is unusual, you’re right. “A COLA boost of 8.7 percent is very rare and will likely be the largest increase ever received by most beneficiaries alive today,” says The Hill. “Historically, increases rose above 8.7 percent only three times. All of those hikes were decades ago — between 1979 and 1981 — which was also a time of high inflation.”

While the Social Security program dates to the administration of Franklin D. Roosevelt in the 1930s, the advent of annual automatic COLAs is more recent, first appearing when Gerald Ford was in the White House in 1975. As The Hill explains, the adjustments are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (sometimes called the CPI-W). Senior advocates have for years recommended using a different gauge called the CPI-E (for Consumer Price Index – Elderly) that they say more closely reflects spending habits of retirees, but that campaign has so far been unsuccessful.

COLAs are Designed to Help Retirees Keep Up

“Annual increases help ensure beneficiaries maintain buying power when inflation causes prices to spike,” the article explains. “They are also permanent and will gradually increase incomes throughout individuals’ retirement years.” But the impact of the generous COLA for 2023 may not be what seniors hope for.

“Whether an extra $144.10 each month translates into greater purchasing power remains to be seen,” writes Melilli, “as a large proportion of older individuals’ benefits goes toward paying for health care and housing— two sectors that have seen costs spike.”  Many seniors live financially precarious lives, as noted by the National Council on Aging which estimates more than 15 million U.S. adults aged 65 or older are economically insecure and have incomes below 200 percent of the federal poverty level.

Geography also matters a great deal, says The Hill. “Inflation rates and housing costs can also vary depending on where you live, and not every beneficiary will receive equal benefits from the COLA,” the article observes. Moreover, there’s a potential downside for beneficiaries when it comes to income taxes. “The large COLA might also put some retirees over an income threshold that requires them to pay income taxes on part of their benefit,” says the article. Today, single filers with income equal to or below $25,000 – and joint filers at $32,000 or below – pay no taxes on their benefits.

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(originally reported at www.thehill.com)