Do you remember anything from 1981?
Maybe you listened to early ’80s music on your Sony Walkman. Perhaps you played Pac-Man at the local arcade. Or maybe you watched Muhammad Ali’s final boxing match.
Heck, I bet some of you weren’t even around in 1981. After all, it was a generation ago.
I’m writing about 1981 today for a simple reason…
Social Security’s cost-of-living adjustment (“COLA”) just hit its highest level since then.
In 1981, COLA peaked at 11.2%.
This month, the Social Security Administration announced that its COLA would be 8.7% in January 2023. That will result in an average benefit increase of $146 per month.
On one hand, I want to rejoice for the folks who desperately need the extra money. But on the other hand, I’m fearful of the potentially dangerous longer-term effects.
You see, this ride on the Social Security “time machine” comes at a cost…
To calculate COLA, the Social Security Administration uses something called the “CPI-W” calculation. That’s the Consumer Price Index for Urban Wage Earners and Clerical Workers.
Not surprisingly, the CPI-W shows that the cost of living has soared since the COLA for this year. That makes sense. After all, prices for ordinary consumer goods are surging…
A carton of eggs costs more than twice what it did at the beginning of 2021. Meat prices are up nearly 20% over that span. Even banana prices have jumped around 10%.
The rising costs of “small” goods add up. For folks on a fixed income, that’s a huge deal…
Social Security makes up 90% of the income for a quarter of retired Americans. And for about half of the folks receiving benefits, the checks make up roughly half of their income.
So put simply, soaring costs are squeezing them. And I want to see their lives made easier.
But COLA is a double-edged sword. It also puts much more pressure on the system itself…
The Social Security program is a form of federal spending financed from the tax in our paychecks. Social Security represents 21% of the federal budget.
The annual payout is $1.2 trillion. And again, that figure will now be 8.7% higher in 2023.
When you first hear that COLA payments are increasing by $146 per month, that might seem trivial. However, you need to look at the broader picture…
That works out to an average increase of $1,752 per year for every recipient. And in the end, this one adjustment will add about $116 billion to America’s annual Social Security bill.
It will go on forever, too. Once a COLA is made, it doesn’t get reversed.
The fact is… the system needs more money. That isn’t ideal as we head into a recession…
Recessions mean less productivity. They mean fewer people working. That translates into lower wages. And ultimately, folks, that means lower tax revenue to fund Social Security.
But at the same time, the inflation issue is even more pressing. No matter where it comes from, more money in the system is inflationary. That includes COLA.
While the COLA will help folks in need, it comes at the same time that the Fed is already struggling to control inflation. It’s adding more pressure on an overloaded system.
And frankly, it might not be enough if inflation stays high.
When you put it all together, it’s clear that we haven’t reached the end of this story yet. The uncertainty surrounding Social Security will likely continue beyond this COLA update.
If you’re not careful and everything blows up, your retirement could get wrecked.
Plan accordingly.
Good investing,
Pete Carmasino
