Plot Twist: Inflation May Help You

**Nicole Lapin** (0:01)
Are you ready for some money rehab?

**SPEAKER_2** (0:05)
Wall Street has been completely upended by an unlikely player.

**Nicole Lapin** (0:10)
And should I have a 401k?
Girl!
We have all been feeling the effects of inflation. And for most of us, those effects are less than ideal. We're paying more at the grocery store, at the gas pump, and all of a sudden our paychecks get us less. But there's actually one group of Americans that has gotten some good news on inflation, and that group is Social Security Beneficiaries. The Social Security Administration does something for beneficiaries that is very smart and very important. Annually, there's an evaluation to determine whether macroeconomic factors, specifically inflation, are affecting the cost of living. If that evaluation turns up evidence that inflation will affect Social Security beneficiaries, the Social Security Administration applies what they call a cost of living adjustment or COLA.
Through COLA, the Social Security Administration helps Social Security benefits keep up with inflation. Interestingly, and don't ask me why, the adjustment is determined based on data from the third quarter of the fiscal year. So to determine the COLA number for next year, the meter rating on inflation, so to speak, will happen between July and September of this year. That means the inflation we're seeing right now, as you're listening to this, is going to affect the COLA determination for 2023 And as a side note, if you have any questions on how social security works, how much you can expect to earn, and how much you're contributing now, check out Money Rehab episode 207 WTF is Social Security. We've linked it in the show notes. Last year, COLA increased benefits by 5.9%, which was the biggest COLA increase in 40 years. Early estimates project that next year, the increase will likely be even higher.
Some estimate that COLA will increase to 8%, while the nonpartisan organization, the Committee for a Responsible Federal Budget, says that number could be closer to 10.8%. According to CBS News, the average monthly Social Security check in 2022 is about $1,658, which means a bump of 8% would boost the typical check to about $1,790, while a 10.8% COLA would boost the typical check to $1,837. It's still early for projections, but most experts are predicting the COLA for 2023 to fall between that 8% to 11% range. We'll know the COLA rate for sure by December at the latest, and updated benefits will begin getting paid out starting in January of 2023 Adjusting Social Security benefits for inflation is a positive thing for beneficiaries, and arguably, it's what allows the Social Security Administration to stay relevant during difficult economic times and achieve their mission of providing financial support to retired Americans and people in need. But I can't help but think of all the federal programs that don't keep track with inflation.
Like minimum wage. The United States used to adjust the minimum wage to keep up with inflation and other cost of living metrics. And thank goodness for that, because in 1938, the minimum wage was 25 cents. But here's the thing. In 1969, the government stopped adjusting minimum wage for inflation. And now, the United States government does not have any legal requirement to periodically review minimum wage. There's no spring cleaning where Congress is like, hey, we're in a global pandemic and a recession and completely reliant on essential workers, some of whom are making minimum wage.
Should we maybe pay them more? Nope.
Those conversations don't happen yet, but I can be hopeful. My home state of California, for example, has a provision in the law that allows for some wages to be raised in response to an increase in inflation over 7%. And that raise is going to go into effect. Governor Gavin Newsom announced that the minimum wage in California will go up from $15 an hour to $15.50 an hour starting in January. But there are some California cities that have decided to raise wages even more, and those increases are taking place this month. But back to our Social Security beneficiaries. A cola hike is great news for the folks receiving Social Security benefits now, but potentially not such great news for folks expecting to collect Social Security a few decades from now.
A hike in the cola will cost the Social Security Administration tens of billions of dollars, and the Social Security Administration is already facing insolvency. It's an issue we'll see debated in Washington, so stay tuned. But for now, here's today's tip you can take straight to the bank. Regardless of the cola, when you retire, Social Security will not replace your income. In fact, Social Security was never intended to replace your income when you retire, so you will need to supplement your retirement nest egg with other vehicles. If you've been listening for a while, you know I love me a good Roth IRA. To learn more, check out Money Rehab episode 63, Choose Your Fighter, 401k or Roth IRA.