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

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

Social Security payments form a large part of the typical retiree’s income, so the recent 8.7% COLA increase in these payments is likely helping to support their spending, the Bank of America Institute said. Social Security is the sole source of income for about one in five people aged 65 and older.

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

Older generations had reduced spending more than other cohorts over the pandemic, so some of the acceleration is likely a delayed reaction to that, the Bank of America Institute said. The waning impact of past stimulus payments on younger generations’ spending may also be playing a role.

Over the course of 2022, older households increased card spending at a similar pace to all age groups. But since the end of November 2022, spending growth in the older generations appears to be exceeding the average across all ages. The higher COLA adjustment was announced in October and started hitting Social Security recipients’ accounts in January.

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

The 8.7% COLA rise 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 a law passed in 1975. CPI-W inflation moves very closely with the usual headline consumer-price index (CPI) measure. 

What makes the current COLA rise interesting is that it is high by recent history – it’s the largest in over 40 years – but also that inflation has come down some since the third quarter of 2022. The January rate of CPI-W inflation was 6.3% and forecasts from Bank of America Global Research for overall CPI inflation suggest it could be around 6% for the first quarter of 2023. 

To dig deeper into the impact of this Social Security COLA increase, the Bank of America Institute looked at the aggregated credit and debit card spending of households where a Social Security deposit came into their Bank of America account through an automated clearinghouse compared with those that did not receive a deposit. 

Given people retire at different ages and it’s not just retirees that receive Social Security, this helped the firm study the spending impact from COLA better than just looking at complete generations.

The Bank of America Institute looked at the growth in total card spending per household since November 2022 for three groups: all households, those households in the baby boomer and traditionalist generations, and finally those baby boomer and traditionalist generation households with income below $50,000. 

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

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

Looking just at the baby boomer and traditionalist generations, the impact is worth more: 2.5%. For lower income (below $50,000) older generations, the impact of COLA is estimated at 3.8%. 

Because people receive Social Security payments through the month it could be that the full impact of the COLA rise is still being felt as people got the extra cash at different times over January. 

When looking at the growth in spending between November 2022 and Feb. 1 to 18 (rather than the whole of 2023), the Bank of America Institute found larger impacts, suggesting this is the case. For lower income baby boomer and traditionalist generations, the impact is as high as 5.7 percentage points.

Older cohort spending on services in particular is rising at a faster pace than the generational average, perhaps reflecting their pent-up desire to enjoy travel and leisure activities, the bank said.

“Some of these older generations don’t save much because they’re not needing to sock it away. When they get an increase, they’re likely to spend it,” Tinsley said.