It’s risky to retire on Social Security alone. The reason for this is that although most seniors need roughly twice as much money to sustain a decent living as younger people do, those benefits will only replace around 40% of the average worker’s pre-retirement salary.
But in practice, many individuals do wind up retiring mostly or entirely on Social Security. And those same individuals are likely to be the ones most affected by Social Security increases.
Benefits are subject to a cost-of-living adjustment (COLA), which is based on inflation rates, each year. Benefits will probably grow significantly by 2023 since inflation has been quite high this year. However, it is debatable as to whether it is indeed a good thing.
A Mixed bag
Benefits for those receiving Social Security increased by 5.9% this year. Early in the 1980s was the last decade where benefit increases exceeded 5.9%. As a result, the boost for seniors next year may be the biggest they’ve received in the last 40 years.
The COLA for 2023 cannot yet be predicted with certainty. This is due to the fact that the increase will depend on CPI statistics from the third quarter for office employees and wage earners in metropolitan areas (CPI-W). Since it’s still September, the Social Security Administration won’t provide the COLA for the next year until practically mid-October, at which point a complete set of third-quarter statistics will be available.
However, given the available statistics, it’s reasonable to expect that the COLA for the next year will far exceed the 5.9% seniors received this year. You can count on the final figure to be high even if it is in the center of the estimated range, which runs from around 8.5% to over 11%.
However, it’s not always a positive thing. After all, rising inflation is the sole factor contributing to 2023’s COLA being so large. It’s likely that Social Security recipients will see a decline in purchasing power in 2023, even if their monthly benefits significantly rise, since the CPI-W doesn’t always take into account the costs that are most relevant to seniors.
Avoid depending too much on Social Security
Consumers of all ages have been suffering from inflation, but pensioners on fixed incomes have been hit especially hard. Current seniors who rely primarily or exclusively on Social Security may not have many options for combating the high rate of inflation other than to attempt to modify their spending patterns and look into part-time employment.
However, for present employees hoping to avoid a similar fate in retirement, the answer essentially comes down to active saving in order to have more income available later in life. A nest egg of around $408,000 may be created by saving $300 per month for 30 years in a retirement plan. This amount would need to be invested at an average annual return of 8%, which is somewhat less than the average return on the stock market.
The current generation of seniors who have access to savings are undoubtedly doing far better than those who are just relying on a Social Security payment. And no matter how much the COLA is in 2023, that will probably still be the case.