Is a Monster Social Security Increase on The Way? Not Necessarily

Is A Monster Social Security Increase On The Way? Not Necessarily

Big, gigantic, huge, tremendous. Pick one of these adjectives, and you’ve probably seen it used to describe the upcoming Social Security cost-of-living (COLA) adjustment.

Some have predicted an increase of nearly 11%. If that happens, it would be the third-highest COLA in history.

Is a monster Social Security increase really on the way? Not necessarily.

Image source: Getty Images.

Counting chickens

You’ve no doubt heard the old expression to not count your chickens before they hatch. The idea is that it’s unwise to assume something will happen before it actually does. While it could be tempting to bank on a massive Social Security COLA, there’s no way to be sure yet what the size of the increase will be.

Yes, COLAs are intended to help keep Social Security benefits from being eroded by inflation. And yes, inflation so far in 2022 has been at levels not seen in four decades. Does that mean that your COLA will automatically be higher than its been in nearly 40 years? Unfortunately, no.

The reason is that COLAs aren’t calculated on the inflation rates throughout the year. Only the averages from the third quarter of the current year and the previous year are used. Also, the metric used to determine Social Security increases — the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W — differs a little from the one most often used to measure inflation (the Consumer Price Index for All Urban Consumers, or CPI-U).

Of course, no one knows what the average CPI-W will be for the third quarter of 2022 because the quarter hasn’t ended yet. We don’t even know what the CPI-W for August was at this point. The Bureau of Labor Statistics won’t release the data until Sept. 13.

Change in the air

Granted, if inflation (as measured by the CPI-W) in Q3 is as high as it’s been throughout the first seven months of this year, your Social Security COLA will be quite large. A level of nearly 11% would be unlikely, but an increase in the ballpark of 9% could be in store in this scenario.

However, there are multiple signs that inflation could already be trending lower. For one thing, the CPI-W for July dipped slightly from the level in June. More importantly, though, two of the key drivers of rising inflation appear to have lost some steam.

Gas prices have fallen significantly over the past couple of months. On June 14, 2022, the U.S. average price for unleaded gasoline reached $5.02 per gallon. As of Sept. 8, the national average was $3.75 per gallon, according to AAA. That’s a 25% decrease. Some experts predict that gas prices could continue to decline.

Transportation costs impact the cost of lots of products, especially food. As gas prices fall, it’s likely that the prices of other goods could decline, as well.

In July, home prices slid from the previous month for the first time in three years. The decline was the largest since 2011. This trend seems likely to continue. Fannie Mae‘s recent National Housing Survey found that the number of Americans expecting home prices to fall spiked in August.

Lower than some predict — but still significant

We won’t know what the actual COLA will be until mid-October. However, there appears to be a good chance that your Social Security increase will be lower than many expect.

Even with the possibility that inflation will fall in Q3, though, the CPI-W average could still be much higher than the prior-year period. Whether you call it a monster increase or not, Social Security recipients are almost certainly in store for a much larger COLA than they’ve had in a long time.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.