It’s no secret that inflation has reached monstrous proportions in 2022. This has placed a significant burden on elderly, many of whom rely heavily on Social Security.
Meanwhile, Social Security recipients have been subjected to months of conjecture about next year’s cost-of-living adjustment (COLA). Because of the way inflation was heading, some analysts were asking for an 11% increase at one time.
The Social Security Administration said last week that recipients’ compensation will increase by 8.7% in 2023. This is the greatest COLA in decades, and it might help seniors gain a lot more purchasing power in the coming year.
Will that, however, occur? Despite being meant to do so, Social Security COLAs have traditionally struggled to keep up with inflation. While Social Security users may gain purchasing power in 2023, one thing must happen for them to be financially ahead.
It all comes down to inflation.
COLAs for Social Security are linked to inflation. And, if the rate of inflation slows in 2023, Social Security recipients may discover that their 8.7% COLA will go a long way. However, if inflation continues to surge or crawl upward in 2023, seniors may lose purchasing power.
Unfortunately, Social Security recipients are all too familiar with the latter scenario. According to the nonpartisan Elderly People League, Social Security recipients have lost 40% of their purchasing power since 2000. To put this another way, for every $100 in goods or services purchased 22 years ago, beneficiaries could only afford $60 today.
Part of the issue here derives from the method by which COLAs are computed. COLAs are calculated using third-quarter data from the Consumer Price Index of Urban Income Earners and skilled Workers (CPI-W), a subset of the larger Consumer Price Index. When the CPI-W shows a yearly increase in inflation, Social Security payments are increased.
However, the CPI-W is not an adequate estimate of the prices that elderly confront. Take, for example, healthcare. Social Security users sometimes spend a large portion of their income on medical expenses, although this is not a significant driver of the CPI-W, whereas petrol prices are. And, unless politicians change the way COLAs are calculated, Social Security recipients may continue to lose purchasing power rather than gain it from year to year.
Let’s see what happens.
It’s possible that inflation may slow down in 2023, leaving seniors in a better position to take advantage of their 8.7% boost. However, this is not guaranteed, which is why workers are frequently advised to save money for their retirement so that they will have income other than Social Security to draw on.