Social Security recipients could see their purchasing power increase in a recession

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Older people who collect Social Security could see price increases ease or even decline in the event of a recession.

Elijah Nouvelage/AFP via Getty Images

Seniors stressed by high food, fuel and health care prices will notice they have more purchasing power in January, when Social Security checks rise 8.7%. But if the United States slips into a recession within the next year, as most economists predict, inflation could come down and that permanent increase in benefits could look even bigger, at least for a while.

The Social Security Administration announced Oct. 13 the largest cost-of-living adjustment (COLA) in 40 years, increasing the average retiree benefit from $146 per month to $1,827 in 2023. The increase follows a COLA 5.9% for 2022.
January’s sharp increase is meant to offset high inflation, which hit 8.2% in September, its seventh straight month at 8% or higher.
But the price hike may have peaked. According to the latest summary of economic projections from the Federal Reserve, inflation is expected to fall to 2.8% in 2023. Economists expect inflation to fall further to 2.3% in 2024 before returning to the rate Fed’s 2% target by the end of 2025.
In the event of a bad recession, prices would likely moderate further or even decline. Social Security never decreases benefits, so in a deflationary year, retirees would see their real income increase. But the increase would not be permanent.
The government calculates the annual COLA using the Consumer Price Index for Urban Wage and Clerical Workers, or CPI-W, a subset of the broader Consumer Price Index. The 8.7% increase in January is based on the change in CPI-W from the third quarter of last year, according to the SSA. Retirees won’t get another COLA until prices rise above their current levels, even if it takes more than a year.

COLAs affect nearly 70 million Americans who receive Social Security or Supplemental Security Income benefits. Amid high inflation rates, 43% of seniors say they have cut back on discretionary spending this year, according to a new survey from the Employee Benefit Research Institute. The poll found that 27% of seniors are spending more money every month than they can afford, up from 17% in 2020.
The Federal Reserve has raised interest rates to lower demand for goods and services, and rising borrowing costs have already cooled the housing market. A recession would further reduce consumer demand, slowing inflation and potentially driving down prices for many products,
according to Rob Williams, managing director of the Schwab Center for Financial Research. Lower prices would mean more purchasing power for seniors until inflation picks up, Williams said.

“These higher payments will continue,” he said, adding that in the event of deflation, the elderly “could end up coming out ahead.”
Of course, if a recession leads to deflation, it would cause COLAs to fall in subsequent years as prices catch up. In fact, following the financial crisis, no COLAs were granted in early 2010 or 2011. The COLA that came into effect in January 2009 was 5.8%, the highest in 27 years, based on the price increase the previous year. So as the economy slumped in late 2008 and consumer demand waned, older people had more purchasing power, even though they would go two years without another benefit increase, according to Dr Jason Fichtner, senior researcher at the Alliance for Lifetime Income, which educates consumers about annuities.
“It took two full years of slow inflation before it got back to the point where a COLA was automatically required,” he said. “COLA is locked down, so older people have benefited from the rising cost of living as prices have come down.”

A sharp drop in energy prices can quickly lower inflation. There was also no COLA at the start of 2016, largely due to falling gasoline prices, and the following year it was just 0.3%.
The United States last experienced severe widespread deflation during the Great Depression, when consumer prices fell 25% from 1929 to 1933, according to the Federal Reserve Bank of St. Louis. But Japan has experienced deflation for much of the past two decades.

Right now, of course, no one is thinking about deflation, with the United States experiencing its worst inflation in decades. The 8.7% COLA for 2023 is expected to make a difference for millions of seniors. Overall, Social Security benefits make up about 30% of the income of American seniors, according to an SSA fact sheet. It’s the average. Many older people are much more dependent on social security. Among elderly beneficiaries, 37% of men and 42% of women receive at least half of their income from Social Security, according to the SSA.
For these seniors, next year’s COLA is important, Fichtner said.
“I think people are going to notice it,” he said. “For people with budget constraints, living on Social Security or mostly on Social Security, this is a significant increase. This will help them pay the bills.
With interest rates rising, seniors who don’t need their COLA to pay for essentials should consider paying off their credit card debt, according to Connor Spiro, senior financial consultant for John Hancock. Alternatively, they could add to their rainy day fund, recognizing that most seniors will face an unexpected expense at some point, he said.

The EBRI survey revealed that 69% of older people had at least three months
emergency savings. “If they don’t have high-interest debt, they may want to increase the amount they save and create a
little buffer there,” Spiro said.
Kelly LaVigne, vice president of consumer insights at Allianz Life Insurance Co., says it’s always wise to save a few extra dollars each month, especially with rising health care costs. He adds: “There’s always the idea that I don’t know how many years I have left, so I’m going to spend it. There are two schools of thought here. »

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