when most Americans retire, social Security becomes an essential source of income. Based on surveys conducted over the past 20 years by national pollster Gallup, between 80% and 90% of retired respondents claim that their Social Security benefits are a “major” or “minor” source of income.
Given the program’s important role in keeping our nation’s retired workers out of poverty, it should come as no surprise that Social Security’s most anticipated annual announcement is its cost-of-living adjustment (COLA).
Social Security’s COLA is the program’s most anticipated annual announcement.
Social Security’s COLA is the “increase” that beneficiaries received in most years to account for the rising cost of goods and services, which you probably know better. inflation, COLA is effectively a mechanism designed to help Social Security’s more than 66 million beneficiaries maintain their purchasing power over time.
Prior to 1975, inflation-based adjustments to payments were made randomly and had to be approved by special sessions of Congress. Since 1975, COLA is calculated annually by the program’s inflationary tether, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The CPI-W is made up of a large basket of goods and services, each with its respective percentage weighting. The importance of each component having its own weighting is that it allows the CPI-W to be expressed as a single number, which can then be compared to previous months or year-ago periods to determine the rise in prices (inflation). Can be done easily. Declined overall (deflation).
Except for three years since 1975, Social Security beneficiaries have received a “raise” the following year. And in case you were wondering why I put “raise” in quotation marks, it signifies that this increase in monthly benefits is designed to keep pace with inflation and is not the same as the increase you would get on a regular basis. Can leave behind the current inflation rate received from the employer.
Your 2024 Social Security COLA may be in vain
This year, Social Security beneficiaries are truly enjoying a historic COLA. The 8.7% “increase” he received is the biggest in percentage terms in 41 years. In nominal-dollar terms, Average monthly incentive pay of $146/month for retired employees Largest on record.
Unfortunately, your 2024 Social Security cost-of-living adjustment, which is still seven months away from being announced, looks set to disappoint — and there’s an extensive history of evidence to support this claim.
The problem is that US inflation is likely to ease during the second half of 2023. This is problematic when looking at Social Security’s COLA calculation. Based on CPI-W reading taken during Q3 (July to September). If the inflation rate subsides significantly, there will be a “surge” for the next year’s more than 66 million beneficiaries of the program.
Why will the US inflation rate fall in the second half of the year? The answer to the dreaded “R” word is: recession,
During a recession, economic activity slows and the unemployment rate rises. Most importantly, consumers and businesses reduce their spending on goods and services, which weakens demand. Concurrently, energy commodities, such as oil, which helped propel inflation to a four-decade high of 9.1% in June 2022, often decline.
Three faultless indicators portend an impending recession that will drive down COLAs
To be perfectly clear, it is not possible to indicate ahead of time when a recession will occur or how long it will last. However, many recession-forecasting tools with flawed track records dating back more than half a century all agree that a recession is on its way to the US.
The most famous of these indicators is Federal Reserve Bank of New York’s Recession Probability Tool, This indicator uses the spread (i.e., the difference in yields) between three-month and 10-year Treasury bonds to determine how likely a US recession is within the next 12 months. Over the past 56 years, every time the NY Fed’s recession-probability tool has exceeded 40%, we’ve had a recession. It crossed this mark for December 2022 and reached 57.13% in January 2023.
It’s a relatively similar story for the US ISM Manufacturing New Orders Index, which is tasked with measuring new industrial order activity. This index is measured on a scale of 0 to 100, with 50 being the base line. Any number above 50 indicates expansion of industrial orders, while a figure below 50 indicates contraction.
For about 70 years, anytime the US ISM Manufacturing New Orders Index has fallen below 43.5, the US has fallen into recession. In January 2023 it reached 42.5.
The Conference Board also plays the Leading Economic Index (LEI). Impeccable track record of predicting recession given certain parameters, The LEI, which takes into account 10 economic inputs and is expressed as a six-month annualized growth rate, has been accurately predicting recessions for the past 64 years. Whenever LEI declines by more than 4%, a recession is imminent. The December 2022 LEI was -4.2%.
While it is possible that the worst of a potential U.S. recession will be avoided by the three key months when Social Security’s cost-of-living adjustments are calculated, all indications from these faultless indicators are that the prices of most goods and services will decline significantly. It’s going to be Not too distant future.
In other words, your 2024 Social Security COLA is probably going to be a Distant Shout This year passed with an increase of 8.7%.
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