How to guess the 2023 Social Security cost-of-living increase

UPDATE: As of June’s CPI numbers, the increase is likely to be 9%.

Inflation is running hot and fast. Department of Labor inflation figures for April, released earlier this month, had the consumer price index up 8.3% over this time last year. The CPI-W — the figure for urban wage earners and clerical workers that is the index used to calculate Social Security benefit increases — was up more, at 8.9%.

Those, however, are backward-looking measures.

Meanwhile, some of the talking heads are saying that inflation will slow later this year. Others disagree. They argue that we’re stuck with higher inflation.

It’s all speculation.

We don’t know the future. This is a permanent condition. The best we can do is use recent inflation data and add regular monthly data. It won’t predict the exact future, but it’s likely to be the better guesstimate.

It’s also something you and I can do, as they say, in our spare time, at home.

Here’s how to do it.

Step one

The basis for every Social Security benefit calculation is the average of the index figures for the third quarter of the previous year. In the third quarter of 2021, the average of the CPI figures for July, August and September was 268.421. (You can download the complete history of this since 1974 here and here.)

The Social Security benefit increase for 2023 will be the average of CPI figures for the third quarter of this year divided by that 268.421 figure from last year.

Step two

The Department of Labor releases an update of its inflation figures each month. The figures for April were released May 10. They are typically released about 10 days into the month. The monthly release is focused on the year-over-year percentage change in inflation as a whole. But it also contains figures for a multitude of things that go into the index. You’ll find the actual index figures toward the end of the news release.

To see the progression of inflation month by month, you divide the new index figure by the third-quarter figure. This will give you an index figure.

Step three

To get the percentage figure, subtract 1 from the index figure to get the change as a decimal. Change to a percentage by multiplying by 100. In April, for instance, the index figure is 1.0602 (284.575 divided by 268.421). So the percentage figure is 1.0602-1, or 0.06 times 100, 6%.

As you can see in the table, the inflation for October 2021 was 1.17% ahead of the inflation for the third quarter. Since then it has risen, month by month, to 6.02% by April.

(Editor’s note: This table will update each month as CPI figures are released.)

Consumer prices would have to decline between April and September for next year’s Social Security benefit increase to be less than 6%. That doesn’t happen very often. Indeed, it has happened only once, in 2012, since the cost of living adjustment for Social Security began in 1975. (But don’t get cocky about your future increase: The increase has been zero three times, in 2009, 2010 and 2015 — all in this century.)

The average increase between April and the third quarter of the previous year has been 2.3%. The median was 2%. This suggests, but does not guarantee, that the Social Security cost-of-living adjustment for next year will be 8% to 8.3%. In fact, the changes during this period vary widely. The only thing we know for certain is that the figure is unlikely to be less than 6%.

If it is about 8%, that will be the largest increase since the 11.2% increase in 1981 — over 40 years ago. It will also be tied for the fourth-largest increase since the indexing of benefits began in 1975.

Will it be accurate?

In general, the consumer price index reflects the inflation we all experience as a group. But it can never show what we experience as individuals or households. If you’re older, it understates your cost of living because it doesn’t reflect your higher costs for prescriptions and health care, which are a larger part of your spending. If you’re younger and rent, it may come nowhere near reflecting the increase in your monthly rent.

A parsimonious friend of mine uses rabbit ears to watch TV. That means he’s not affected by the price increases for Netflix and Amazon Prime. But the cost of my Southwest Airlines tickets has doubled — and I like to go places. Our personal inflation rate depends on what we spend our money on and how it changes in response to prices.

My bet is that all of us will be taking a close look at our spending decisions.

The only thing that looks certain is that retirees are doing a little better than those who still work for a living. While people on Social Security received a 5.9% increase this year, the average annual increase for workers in January was less, 5.5%.

And as retirees appear to be heading for a 6% to 8% increase for 2023, workers are looking at typical wage increases of 5.5%.

All in all, that makes retirement look like a good gig, if you don’t mind the being older part.