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An 8.7% Social Security cost-of-living adjustment for 2023 means beneficiaries will receive an average of $140 more per month starting in January.
Now, new research from the Bank of America Institute shows that spending is rising faster among older generations who earn Social Security income.
According to the Bank of America Institute, household spending for those born in 1964 or earlier increased between 4% and 6% year over year for the week ended February 18, versus 2% for all age groups.
The institute is a think tank within the bank that uses the firm’s internal data to assess consumer trends. Bank of America serves about 67 million customers, or about 1 in 2 households, according to the company.
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Bank of America debit and credit card data showed that older generations spent most of 2022 at a similar pace to other generations. However, spending growth for older generations has exceeded average since late November, the study found.
Older generations may have increased their spending growth by as much as 3 percentage points due to the Social Security Cost of Living Adjustment (COLA), according to the Bank of America Institute.
The 2023 Social Security COLA was the largest increase in monthly checks beneficiaries have received in four decades.
Approximately 70 million beneficiaries receive Social Security or supplemental income payments. Recipients include not only retirees, but also people with disabilities and family members of the beneficiaries.
While this year’s Social Security COLA may help ease strain on beneficiaries’ budgets, next year’s increase may not be as large.
Here are three important things you should know.
1. Inflation has been “extremely difficult” for retirees.
While Social Security benefits are adjusted for inflation, there is a lag when these changes occur.
While the COLA adjustment was 5.9% in 2022, government inflation data showed costs have been accelerating for much of the past year. Now the COLA of 8.7% for 2023 is outpacing current inflation, with a 5.8% increase over the past 12 months for the Consumer Price Index for Urban Wage Earners and Office Workers, or CPI-W. The Social Security Administration uses the CPI-W to calculate the annual COLA adjustment.
According to the institute, older generations have reduced their spending more during the pandemic compared to other generations.
“It’s extremely difficult for the average retiree to live with these high inflation rates,” said David Tinsley, senior economist at the Bank of America Institute.
A customer shops at a grocery store in Brooklyn, New York, on February 14, 2023.
Michael Nagle/Xinhua via Getty Images
Tinsley noted that increased costs — for example for groceries, rent or utility bills — are particularly burdensome for low-income households and older generations.
“This increase in the cost of living has given them some breathing room to increase their spending,” he said. “But I don’t think anyone would pretend they’re not still under quite a bit of pressure.”
Ongoing polling by the Senior Citizens League, a nonpartisan senior citizens’ group, shows that the proportion of respondents who have credit card debt spanning more than 90 days rose to 44% in the first quarter, up from 35% in the third quarter of 2022.
“The theory is that they should be [catching up]but it’s not that simple,” said Mary Johnson, Social Security and Medicare Policy Analyst at The Senior Citizens League.
2. Social Security COLA for 2024 can be far less
Based on current projections, the League says Social Security COLA for 2024 is likely to be much lower than this year’s 8.7% due to cooling inflation.
“Right now, it looks like COLA could go below 3% for 2024, and honestly if that trend continues, it could even go down to 2% or less,” Johnson said.
The Social Security Administration calculates the annual cost-of-living adjustment by determining the percentage increase in the CPI-W by comparing the average for the third quarter of the current year to the average for the third quarter of the previous year.
When we get some [COLA] anyway, it simply means that inflation is slowly coming down.
Mary Johnson
Social Security and Medicare Policy Analyst at The Senior Citizens League
A COLA in 2024 would mean inflation is higher than last year, Johnson noted.
Instead, there could be very minimal COLA or no COLA for the next year, she said.
“If we get any [COLA] anyway, it just means that inflation is slowly coming down,” Johnson said.
3. This year’s Social Security COLA may affect inflation
Higher spending triggered by the current 8.7 percent Social Security COLA may complicate efforts to bring down inflation.
A more generous Social Security COLA — and similar adjustments to pensions — is encouraging people to resume old buying patterns in the face of high inflation, noted Peter C. Earle, an economist at the American Institute for Economic Research, recently.
That’s because the Federal Reserve is working to curb inflation by raising interest rates.
“That’s another factor complicating the Fed’s effort,” Earle said of spending triggered by higher COLAs.
The central bank is expected to hike interest rates by a quarter point at its meeting this week.
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