In 2023, Social Security recipients will most certainly experience something that no senior has seen in 41 years. The cost of living adjustment (COLA) that they are expected to get will result in the biggest benefit increase since the early 1970s.
This news is good for older Americans, but it isn’t as promising as it appears. To comprehend why, you must understand the cause of this change that will go into effect next year.
Retirees can expect a big change to their benefit in 2023
In 2023, retirees are expected to see a substantial boost in their monthly payments. According to the Senior Citizens League, future seniors could receive an 8.6 percent raise next year. This would take effect in January 2023. It implies that a retiree who receives the current average monthly payment of $1,657 this year will see their pay rise by $142.50 per month or $1,710 every year.
According to the Social Security Board of Trustees, this would be the largest yearly boost to Social Security payments since 1981, when recipients benefited from an 11.2 percent raise. It also far outpaces recent raises for retirees, which ranged from 0% in 2016 to 5.9% in 2022.
Here’s why this change isn’t good news for seniors
It may appear like wonderful news that the largest benefit increases in more than four decades have been given to people over the age of 65. But the truth is that it’s not a good thing for either seniors or others.
COLAs are only used to adjust Social Security benefits for inflation. The COLA is set each year based on the consumer price index, which shows how prices have changed over time. In other words, it’s calculated using inflation, so a significant pay increase implies that goods and services costs have skyrocketed. So while retirees will receive higher payments on paper, they will not have any more buying power with their larger checks. For two key reasons, this is true.
The first major problem is that Social Security raises have not kept up with the true increase in spending among older Americans due to the way the COLA formula works. The gap is significant, with estimates suggesting that benefits have lost 40% of their purchasing power since 2000.
The second problem is that most American seniors rely on both Social Security and savings to get by. Inflation stings savers hard, as the purchasing power of senior investors’ funds will drop when prices rise. Because retirees should be invested conservatively to avoid excessive risk of loss, their returns may not be adequate enough when inflation is too high to keep up with the increase in price levels.
The Social Security Administration hasn’t yet released the increases for 2023, and because they’re based on data from the third quarter of 2018 (July to September), things may still change. But all signs point to rising prices in the months ahead, so seniors should start planning now for bigger Social Security checks that won’t cover inflation over time.