Next month, the Social Security Administration will announce the adjustment of the cost of living (COLA) for 2023.
This adjustment should help ensure that benefits keep pace with inflation. And as inflation has risen at an all-time high this year, retirees can expect a significant increase in benefits.
While we won’t know the official COLA until mid-October, there are signs that it may not be as big as expected. Here’s why that’s actually a good thing.
How much will retirees get from Social Security in 2023?
Last month, researchers at The Senior Citizens League predicted that COLA could rise to 10.1% by 2023. However, based on the most recent data from the Consumer Price Index, they now expect it to be around 8.7%.
While that may be disappointing for retirees expecting massive benefits increases, a lower-than-expected COLA is a promising sign for one reason: it means inflation is slowing.
The annual COLA is not so much a raise as a way to help Social Security maintain purchasing power. A high COLA does not necessarily mean that you have more pocket money. Rather, it means inflation is rising. A lower COLA thus suggests that inflation is rising more slowly.
For example, in the 12 months ending August 2021, inflation has increased by 5.3%, according to the Bureau of Labor Statistics. Shortly after, in October 2021, retirees saw a COLA of 5.9%. This year, in the 12 months ending August 2022, inflation rose by 8.3%. And now experts expect a COLA of about 8.7% for 2023.
|Aug 2019-Aug 2020||1.3%||1.3%|
|Aug 2020-Aug 2021||5.3%||5.9%|
|Aug 2021-Aug 2022||8.3%||8.7% (predicted)|
In other words, the annual COLA tends to track inflation, and a lower-than-expected COLA means prices may fall again.
The bad news about the COLA. from next year
The good news is that inflation appears to be cooling, and an increase in benefits could bring much-needed relief for seniors. The average retiree will collect about $144 more per month with a COLA of 8.7%, which can go a long way toward providing daily necessities.
The bad news, though, is that despite annual COLAs, Social Security is still consistently losing purchasing power.
This is partly because the COLAs are based on the Consumer Price Index for City Wages and Administrative Employees (CPI-W). The CPI-W tracks the spending patterns of working-age Americans, which can be vastly different from the spending patterns of retirees. As a result, major senior spending, such as housing and medical care, is underrepresented when calculating the COLA.
Over time, this has made it harder for Social Security to keep up with seniors’ actual spending. In fact, since 2000, benefits have lost about 40% of their purchasing power, according to a report by The Senior Citizens League.
To be clear, the annual COLAs are still useful for seniors, especially when inflation is rising. Just be sure to keep your expectations in check, as this extra cash may not go as far as you think.