The 8.7% COLA jump-started spending for Social Security recipients

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Older adults are spending more money, thanks to the biggest increase in the Social Security cost-of-living adjustment (COLA) in nearly 40 years.

According to new research from the Bank of America Institute, households that received Social Security payments grew spending faster than households that did not. The firm looked at aggregated credit and debit card data and found that older generations are currently increasing their spending at a faster pace than younger groups.

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“Historically, older generations were spending in line with other generations. This widening was a bit unusual,” said David Tinsley, senior economist at the Bank of America Institute. “Cola has boosted the older generation’s spending. The jury is a little out on when the spending will stop.

The Bank of America Institute noted that Social Security payments make up a large portion of the typical retiree’s income, so the recent 8.7% COLA increase in these payments is helping to support their spending. Social Security is the only source of income for one in five people age 65 and older.

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Social Security COLA 2023 benefits are rising 8.7%—here’s what it means for recipients

The Bank of America Institute said some of the accelerated response may have been delayed because older generations had reduced spending more than other peers on the pandemic. The diminishing effect of past stimulus payments on the spending of younger generations may also play a role.

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Through 2022, older households increased card spending at the same pace as all age groups. But through late November 2022, spending growth among older generations appears to be higher than the average for all ages. The higher COLA adjustments were announced in October and began hitting Social Security recipients’ accounts in January.

As of the week ending February 18, baby boomers and the preceding generation, traditionalists, increased total card spending per year by 4% and 6%, respectively, compared to only 2% year over year for all ages.

The 8.7% COLA increase in Social Security benefits was based on the annual rate of inflation in the consumer-price index for urban wage earners and clerical workers (CPI-W) in the third quarter of 2022. COLA increases have followed this pattern since then. A law passed in 1975. CPI-W inflation moves very closely with the general headline consumer-price index (CPI) measure.

What makes the current COLA increase interesting is that it’s a recent history high — it’s the largest in more than 40 years — but also that inflation has slowed somewhat since the third quarter of 2022. The January rate of CPI-W inflation was 6.3% and Bank of America Global Research’s forecast for overall CPI inflation suggests it could be around 6% for the first quarter of 2023.

To examine the impact of this Social Security COLA increase in depth, the Bank of America Institute looked at the overall credit and debit card spending of households where Social Security deposits came into their Bank of America account through an automated clearing house. Was. Deposit is not received.

Noting that people retire at different ages and not just retirees who receive Social Security, helped the firm better study the spending impact from COLA than looking at entire generations.

The Bank of America Institute sees total card spending per household increasing through November 2022 for three groups: all households, those households in the Baby Boomer and Traditionalist generations, and finally Baby Boomer and Traditionalist generation households with incomes below $50,000.

The Bank of America Institute considered two measures of ‘current’ spending – one looking at average card spending through 2023 to now, and the other looking at average card spending from February 1 through February 18.

For all households, the firm found that spending growth among those receiving Social Security payments is 2.1 percentage points higher through November 2022 than among those not receiving Social Security payments.

Looking at the baby boomer and traditionalist generations, the effect is higher: 2.5%. For lower-income (less than $50,000) older generations, the COLA effect is estimated at 3.8%.

Since people receive Social Security payments throughout the month, it may be that the full impact of the COLA increase is still being felt as people received extra cash at different times in January.

Looking at spending increases between November 2022 and February 1 to 18 (instead of the whole of 2023), the Bank of America Institute found larger effects, suggesting that this is the case. For low-income baby boomer and traditionalist generations, the effect is as high as 5.7 percentage points.

The bank said that the older group’s spending, especially on services, is growing at a faster pace than the generational average, perhaps reflecting their pent-up desire to travel and enjoy leisure activities.

“Some of these older generations don’t save much because they don’t need to put it away. When they get a raise, they’re more likely to spend it,” Tinsley said.

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