Social Security Benefits May Soar 9.6% in 2023, but Retirees Still Face a Big Problem
Inflation has exceeded the 2% target set by the Federal Reserve for 17 consecutive months, and it actually hit a 40-year high of 9.1% in June 2022. A number of factors have contributed to that problem — loose monetary policy, stimulus checks, supply chain disruptions, and geopolitical conflict — and many Americans are feeling the pressure.
As a result, The Senior Citizens League estimates seniors could see a cost-of-living adjustment (COLA) of 9.6% in 2023. That would be the largest COLA since 1981, but there is still a big problem.
The Senior Citizens League also estimates Social Security benefits have lost 40% of their buying power since 2000, and a quarter of that drop has happened since March 2021. To be clear, that loss of buying power has occurred in spite of all the COLAs implemented since 2000, meaning Social Security benefits have failed to keep pace with inflation.
Here’s what you should know.
Why cost-of-living adjustments fall short
COLAs are calculated based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is published by the Labor Department on a monthly basis. Specifically, the average CPI-W for the third quarter of the current year is compared to the average CPI-W for the third quarter of the previous year. If there is a discrepancy, a COLA (equal to the percent increase in CPI-W) is applied to Social Security benefits paid out in the following year.
So what’s the problem? CPI-W measures the average change in prices paid by office workers and other wage earners for a basket of goods and services. But the CPI-W population represents just 29% of the total U.S. population, and the spending patterns of clerical workers and wage earners don’t necessarily reflect the spending patterns of retirees. For instance, Medicare Part B premiums are up 14.5% in 2022, outpacing the 9.1% increase in the CPI-W through the first seven months of the year. Seniors are also more likely to spend time at home, and The Senior Citizens Leagues notes the price of home heating oil skyrocketed 79% between March 2021 and March 2022.
With that in mind, a COLA of 9.6% in 2023 may sound like a big raise. After all, the average retiree would receive an extra $159 per month. But the truth is rising prices will likely eat away at that extra cash, and seniors may actually feel like they have less money.
Of course, that 9.6% COLA is still a preliminary estimate. The actual increase can’t be calculated until CPI-W data from August and September is available. Retirees should expect the Social Security Administration (SSA) to announce the finalized COLA in mid-October. In the meantime, seniors who depend heavily on Social Security retirement benefits should take a look at their monthly budgets and make cuts where possible.
Future retirees still have time to prepare
According to a Gallup Poll, Social Security is currently a “major source” of income for 55% of retirees, but the same poll shows that just 33% of non-retirees expect Social Security to be a major source of income. In other words, many Americans may end up relying on Social Security to a greater degree than they had anticipated.
To hedge against that risk, future retirees should understand how much money they need to retire, and they should use the calculators provided by the SSA to estimate their monthly Social Security benefit. There will almost certainly be a gap between those two figures, and if other retirement plans don’t make up that gap, future retirees may need to rework their budgets or consider delaying retirement.
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