Millions of retirees are eagerly awaiting the Social Security’s Cost of Living Adjustment (COLA) announcement in October. While experts have modest expectations due to lower inflation compared to last year, when COLA was set at 8.7%, there’s a silver lining: the soaring gasoline prices. But how can fuel costs possibly benefit the SSA beneficiaries? Let’s delve into it.
Every year, the Social Security Administration (SSA) announces the COLA in October. This figure is crucial for many beneficiaries as it determines the increased amounts they will receive the following year. The COLA is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the current year’s third quarter, averaging the figures from July, August, and September.
Despite criticisms from many experts regarding the use of CPI-W for COLA calculations, this time, it might actually be advantageous for the beneficiaries. While no one celebrates rising gasoline prices, it might not be all bad news for Social Security retirees.
How rising gasoline prices affect
The primary inflation indicator, the Consumer Price Index for all urban consumers (CPI-U), surged in August at its fastest monthly rate for the year, by 0.6% or 3.7% year-over-year. The primary driver behind this acceleration was the spike in gasoline prices, which jumped 10.6% from July to August. The Bureau of Labor Statistics (BLS) highlighted this as the most significant contributor to the overall monthly consumer price increase.
According to the Solodinero website, the Organization of the Petroleum Exporting Countries (OPEC) reduced oil production during the summer, leading to a rise in fuel prices and its derivatives in August, with the trend continuing into September. Gasoline prices are currently at their highest for the year. The International Energy Agency (IEA) anticipates the oil market to tighten further in the fourth quarter, suggesting that production cuts might persist until year-end.
Interestingly, the timing of this surge in oil prices is quite opportune for retirees. The third quarter is the only period that matters for COLA calculations. Moreover, oil prices are among the most volatile components of the inflation rate, and retirees tend to spend less on gasoline than working Americans since they don’t commute to work.
Increase in Social Security payments
While the CPI-W has slightly different weightings than the CPI-U and covers a smaller percentage of the population, the figures are generally similar. In August, the CPI-W rose by 3.4% year-over-year, compared to the 3.7% of the CPI-U. Without the recent hikes in oil prices, COLA estimates would have been lower, around 3%. With the latest data, if oil prices remain as high in September as they were in August, the Social Security COLA is likely to be between 3% and 3.5%.
On a brighter note, experts are optimistic about fuel prices, expecting them to drop soon. Gas stations will soon switch to a cheaper winter gasoline blend, and gasoline prices typically decline during colder months as demand slows post the summer travel season.