For retirees on a fixed income, big changes to Social Security benefits could affect their finances in profound ways. And retirees are likely to see such a change next year. In fact, seniors will find that their benefits undergo one of the biggest increases in more than 40 years.
Here's why Social Security benefits are changing so much.
The big change Social Security recipients will see next year
Social Security checks will increase next year by as much as 8.6% from a cost-of-living adjustment (COLA). So a senior who was receiving the average benefit of $1,661 last year could see a hike as high as $142.84.
This is a much bigger bump in benefits than typical over the last four decades. The chart below shows how big COLAs have been in recent years so you can see just how big the discrepancy is.
While last year's 5.9% COLA wasn't too much lower than the 8.6% benefits increase retirees could see next year, the 2023 Social Security raise will be a huge departure from the increase most current recipients have seen for the majority of their retirement years. In fact, since 2000, the average annual benefits increase was just 2.29%. An 8.6% jump would be the highest since 1981.
Why such a big change?
Social Security isn't giving seniors a huge benefits increase just to be generous. The reason is simple: Inflation has hit a 40-year record, and the formula used to determine COLAs is specifically designed to ensure benefits keep pace with inflation. When prices go up rapidly, benefit increases are dramatic in order to allow seniors to maintain buying power.
There are a number of potential reasons inflation has surged, including unusually high demand for goods and services combined with supply constraints due to the war in Ukraine and the pandemic causing supply chain issues. Although the specifics might not be as important to individual retirees, every senior should know that their big Social Security increase is the result of economic conditions that could have a far-reaching impact.
The reality is, since prices have gone up so much, a bigger check won't give retirees more buying power but will try to ensure their Social Security benefits continue to allow them to purchase the same level of goods and services as when prices were much lower. And if inflation continues to surge after the COLA is calculated for this year, which is what happened in 2022, then the benefits increase may not even do that.
So the underlying cause of the benefits increase is what recipients need to prepare for. When inflation is high, you need to adjust your investing strategy and your spending.
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