Does keeping seniors’ living standards up make it harder for the Federal Reserve to bring down inflation? Seniors spending more than other age groups has become the great impact of COLA (cost of living allowance) raised 8.7% for 2023.
Cost of living is how much it costs to live at a certain level. A cost-of-living index can be used to measure how the cost of living has changed over time. (Photo: Can Stock Photo)
According to the Bank of America Institute, baby boomers and other Social Security recipients born before 1964 increased their household spending by between 4% and 6% year over year (YoY) for the week ending February 18, compared to 2% YoY for all ages as an impact of COLA raise.
Using data from Bank of America transactions, the institute found that since November 2022, households that get Social Security payments have spent 2.1% more than households that don’t get Social Security payments.
In October, the Social Security Administration (SSA) said that about 70 million Americans who get Social Security benefits would get a cost-of-living adjustment (COLA) increase of 8.7% starting in January 2023.
This meant that the average Social Security benefit for retirees went up by $146 per month, which was the biggest increase since 1981.
According to CNBC, the average amount of money Social Security recipients get each year went up from $1,681 in 2022 to $1,827 this year.
Impact of COLA raising up to 8.7%
While this increase is good news for retirees and beneficiaries, inflation may have been a significant impact of COLA rising up to 8.7%.
The COLA is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures the average change over time in the prices paid by urban consumers for a basket of goods and services. The increase in the CPI-W from the third quarter of 2020 to the third quarter of 2021 is an impact of COLA raise.
Another impact of COLA is increased spending power of Social Security beneficiaries may lead to increased demand for goods and services, which in turn may drive up prices. This could contribute to inflation, which is already a concern for policymakers.
Additionally, the COLA may impact the economy in other ways. For example, the increased spending power of Social Security beneficiaries may stimulate economic growth, as beneficiaries spend their additional income on goods and services. On the other hand, the increase in spending may lead to higher interest rates, as the Federal Reserve may need to take action to prevent the economy from overheating.
Overall, the impact of Social Security’s 8.7% COLA on inflation and the economy is complex and multifaceted. While it may provide a boost to beneficiaries’ spending power, it may also contribute to inflationary pressures and have other economic implications.
Could rising demand be keeping inflation going?
People worry that Americans’ still-high inflation is being affected by the fact that people are spending more money which is an impact of COLA. Some critics said that spending by seniors could hurt inflation and make it harder for the Fed to fight inflation and for President Biden’s Inflation Reduction Act of 2022 to work (IRA).
But when consumer prices and inflation were at their highest levels in 40 years, and the Social Security cost-of-living adjustment (COLA) fell behind, retirees’ benefits were stretched to the limit. They had to cut on food and medicine and do other drastic things to save money.
The 5.9% COLA increase in 2022 was much less than the inflation rate. As the institute pointed out, boomers cut their spending more than other generations did during the pandemic. This increase in spending could be a delayed reaction or a way for seniors to “catch up” as an impact of COLA.
The institute also said that pandemic or stimulus relief payments might have helped older people less than they helped younger people.
With many global and domestic economic shocks that have affected the rate over the past year, the effect of an increase in spending by seniors is likely to be small. Most likely, though, if the Fed is finally able to bring inflation down, the COLA for next year will go down.
A policy analyst of The Senior Citizens League, Mary Johnson, thinks that COLA for 2024 will be very small or none at all.
“Right now, it looks like the COLA for 2024 could go below 3%, and if this trend keeps going, it could even go to 2% or less,” Johnson told CNBC, quoting the government official. “If we get any COLA, it just means that inflation is slowly going down.”
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