It’s hardly a secret that inflation has reached astronomical levels in 2022. That’s put a huge burden on seniors, many of whom get the bulk of their income from Social Security.
Meanwhile, Social Security beneficiaries have endured months of speculation regarding next year’s cost-of-living-adjustment (COLA). And at one point, some experts were calling for a boost as high as 11% due to the way inflation levels were trending.
Last week, the Social Security Administration announced that recipients will see their benefits increase by 8.7% in 2023. That’s the largest COLA in decades, and it’s a boost that could help seniors gain a world of buying power in the coming year.
But will that actually happen? Social Security COLAs have long struggled to keep pace with inflation, even though that’s what they’re designed to do. And while Social Security recipients might gain buying power in 2023, one thing needs to happen for them to come out ahead financially.
It’s all about inflation
Social Security COLAs are tied to inflation. And if the rate of inflation slows down in 2023, seniors on Social Security may find that their 8.7% COLA goes a long way. But if inflation continues to soar in 2023, or creeps upward, then seniors could end up losing buying power.
The latter scenario is, unfortunately, one that Social Security recipients are more than familiar with. The nonpartisan Senior Citizens League estimates that Social Security beneficiaries have lost 40% of their buying power since 2000. Or, to put it another way, for every $100 of goods or services beneficiaries purchased 22 years ago, they’d only be able to buy $60 worth today.
Part of the problem here stems from the way COLAs are calculated. COLAs are based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is a subset of the more well-known Consumer Price Index. When the CPI-W indicates an annual uptick in inflation, Social Security benefits get a raise.
But the CPI-W isn’t really an accurate measure of the costs seniors tend to face. Take healthcare, for instance. Social Security recipients often spend a lot of their income on medical costs, but that’s not a big driver of the CPI-W, whereas gas prices are. And until lawmakers get on board with changing the way COLAs are calculated, Social Security recipients might continue to lose buying power from year to year rather than gain it.
Let’s wait and see
It may end up being the case that inflation cools off in 2023, thereby leaving seniors in a stronger position to make the most of their 8.7% raise. But that’s not guaranteed to happen, which is why workers are often advised to save money for retirement so they have income outside of Social Security to tap.
Of course, it’s too late for current retirees to go back in time and build nest eggs if they didn’t take advantage of that opportunity. But those struggling with higher living costs can consider part-time work if they need a way to boost their income and make up for the fact that their Social Security benefits aren’t going very far.
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