When the Social Security Administration announced an 8.7% cost-of-living (COLA) adjustment for 2023 in mid-October, many seniors could finally breathe a sigh of relief. For months, seniors (and younger consumers, too) have been succumbing to the weight of inflation. And when we look at how well the 2022 COLA held up, it’s easy to see why retirees are struggling.
At the beginning of 2022, seniors on social assistance benefits saw their benefit increase by 5.9%. At the time, that seemed like a generous raise. But this year’s inflation rate has far surpassed that 5.9% increase, putting Social Security recipients at a serious disadvantage.
In a recent Motley Fool survey, 85% of retired Americans say they have definitely felt the impact of inflation and that the higher cost of living has been an issue. Only 3% of retirees say they haven’t really noticed a big increase in the cost of living.
Given the number of seniors struggling financially due to inflation, the hope is that next year’s COLA will help them regain some purchasing power. But that will really only happen if inflation moves in one direction – downwards.
Continued inflation could render next year’s COLA useless
In October, the consumer price index registered a lower annual increase in inflation than in September. So that is already considered a positive sign.
But that doesn’t guarantee inflation will cool in 2023. For all we know, the cost of living could rise even more in the new year, putting seniors who derive most of their income from Social Security in a very difficult position.
The good news now is that the Federal Reserve is clearly determined to slow the rate of inflation. It has been aggressively raising interest rates for months in an effort to discourage heavy consumer spending – and narrow the supply-demand gap that has driven inflation up.
But it’s hard to know how successful the Fed will be. Many Americans are still sitting on leftover cash due to generous stimulus policies legislators enacted during the pandemic. And so it’s hard to predict whether higher borrowing rates will cause a notable pullback in spending or not. And as such, it’s also hard to say whether the Social Security COLA for 2023 will ultimately become the financial lifeline seniors want it to be.
All of this really underscores the importance of an income outside of Social Security during retirement. Seniors who have savings to tap into or investments to pay out are undoubtedly in a stronger financial position today than those who rely largely on Social Security to stay afloat.
Of course, it’s a little late for current retirees to go back in time and start building savings. But those still in work should take note of the financial stress seniors have had this year — and use that as motivation to increase their IRA or 401(k) plan contributions to avoid a similar fate. when it’s their turn to retire.
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