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The Largest Social Security Increase in Decades Is Only 1 Big Announcement Away

The Motley Fool logo The Motley Fool 9/28/2022 Bram Berkowitz

After months of anticipation, Social Security retirees will soon know how the cost-of-living adjustment (COLA) for 2023 will shake out. The COLA is expected to result in the largest increase in Social Security benefits in decades, largely because the calculation is based on inflation, which has been at some of the highest levels seen in 40 years. The Social Security Administration (SSA) is expected to announce the COLA increase on Oct. 13, but before that can happen another huge announcement will be made.

September inflation data 

The SSA calculates the following year's COLA by looking at prices from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Specifically, the SSA looks at CPI-W data from the third quarter of the year, which includes the months of July, August, and September. The SSA averages the CPI-W number for these three months and then compares it to the average CPI-W numbers for the third quarter of the prior year. The percentage difference is the COLA increase for the next year.

For 2022, the COLA increase came in at 5.9%, which is the biggest jump seen in many years. For 2023, the COLA increase is expected to be even bigger. The CPI-W numbers for July and August are already in -- the CPI-W average in these two months was 291.924. In 2021, the CPI-W average was 268.088. This means the CPI-W grew 8.89% for these two months.

Three people looking at computer screens. © Getty Images Three people looking at computer screens.

That's nearly 3% higher than the COLA increase this year, but it's not official yet because CPI-W numbers for September won't come out until sometime in the first half of October.

It's hard to say exactly what that September number will be. Economists had projected inflation to decline in August from July and come in 8% higher year over year based on numbers from the Consumer Price for All Urban Consumers (CPI-U). But inflation actually edged up slightly in August and came in 8.3% higher year over year. While energy prices continued to fall, shelter prices including rent have stayed high.

But I'm still more prone to believe that inflation will start to decline more as the year progresses. The Fed's rate hikes, while large, are still fairly new and need time to work their way through the economy. 

Meanwhile, inflation expectations looking out to next year continue to fall. According to the University of Michigan's closely watched survey that measures one-year inflation projections, recent data this month showed that respondents expect inflation to fall to 4.6% over the next 12 months. That's the lowest the survey has read since September 2021.

Where the COLA adjustment may land

September inflation data will provide Social Security retirees with the last piece of the puzzle they need to calculate the 2023 COLA adjustment. Given that I'm expecting inflation data to come in lower than August, it's likely to drag the final COLA number down from the nearly 8.9% current numbers would imply. But I'm still expecting the final COLA adjustment to end up over 8% and that would still be a hefty increase for 2023.

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