In a recent webinar, the Social Security Administration’s (SSA) Chief Actuary Stephen C. Goss noted, “With the trends we’re seeing this year, it’s likely we’re going to have a COLA closer to 8% than 3.8% next year.”
This came after a discussion on “spiking inflation,” which, as of this writing, registered at 8.6% for the 12 months ended May 2022. Rapidly rising prices have shaken the U.S. economy and plunged consumer sentiment to a lower point than during the Great Recession of 2008-2009.
Let’s explore how soaring inflation could affect your monthly Social Security check in 2023.
The inflation story in 2022
The new year already brought big changes to Social Security checks, with benefits rising 5.9% to account for cost of living adjustments (COLA). Inflation data that arrived in the summer and fall of 2021 necessitated a bump in payouts to allow retired seniors to sustain their purchasing power. At the time, a 5.9% increase in benefits was the highest since 1982.
We’ve come to learn over the first half of the year that this period of inflation is anything but transitory. There’s a significant probability that higher prices are here to stay for some time; companies have been able to raise prices in part because personal consumption figures remain high. On the supply side, the conflict in Ukraine — alongside persistent production and shipping issues stemming from the pandemic — has limited supply in several industries, allowing prices to rise.
Looking ahead to 2023
Since price growth across basic consumer necessities has risen, the SSA is leaning toward a COLA increase in 2023 of somewhere between 8% and 9%. This would again represent the largest COLA since the early ’80s, and it would do quite a bit to help retirees combat rapidly rising prices for the most basic items, such as food, gas, and healthcare.
Because the S&P 500 is, as of this writing, entering a bear market, a COLA of 8% or higher will be critical to prevent retirees on fixed incomes from experiencing a significant decline in living standards. Retirees with stock portfolios may hesitate to sell when values are down, so any increases in income — if only to match rising price levels — are certainly welcome.
From a financial planning standpoint, support for retirees hinges on a combination of Social Security benefits, personal savings, and pension income. With personal savings likely dinged by falling markets, and stable pensions slowly becoming a thing of the past, Social Security benefits must shoulder more of the burden in keeping retirees safe from economic despair.
It’s clear that a COLA of at least 8% will be necessary to fulfill that objective.
Social Security matters for most
If you’re in the fortunate position of not having to rely on Social Security to help cover retirement costs, you’re in the lucky minority. About 65 million Americans will receive Social Security checks in a given year, so it’s important to realize how much COLA increases impact the nation as a whole. Given the continuous price rises we’ve seen, we may need to buckle in for several years of similar adjustments to ensure the health and well-being of our senior population.
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