More than 48 million retired Americans currently receive Social Security benefits, and many of those retirees are facing financial challenges. Recession fears sparked by inflation have caused the stock market to crumble, erasing more than $3 trillion from retirement accounts through the first half of the year. At the same time, the buying power of Social Security benefits has been eroded by the rising cost of necessities like food and utilities.
As a result, half of older Americans have dipped into emergency savings to make ends meet this year. More than 70% of retired workers say inflation is their top concern right now, according to a recent survey from Goldman Sachs.
Fortunately, a big change to Social Security benefits in 2023 could ease the burden on retired workers.
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Social Security benefits will get a massive cost-of-living adjustment (COLA) in 2023
Social Security benefits get an annual cost-of-living adjustment (COLA) to account for inflation. This year, the Social Security COLA was a sizable 5.9%, but even with that extra income, benefits have still failed to keep up with rising prices. Regrettably, that problem was unavoidable.
The Social Security COLA applied to benefits in any given year is based on inflation data (as measured by the CPI-W) from the third quarter of the prior year. The CPI-W rose 5.9% in the third quarter last year, which led to a 5.9% COLA this year, but the CPI-W continued to climb after that COLA had been calculated, peaking at a 9.8% year-over-year rise in June. That means Social Security beneficiaries effectively took a pay cut in 2022. In fact, the 5.9% COLA applied to Social Security benefits fell short by 50% through September, according to The Senior Citizens League.
The chart below shows how inflation (as measured by the CPI-W) has increased in each quarter over the past year.
Time Period
Year-over-Year Annual Increase in CPI-W
Q4 2021 (October through December)
7.4%
Q1 2022 (January through March)
8.7%
Q2 2022 (April through June)
9.3%
Q3 2022 (July through September)
8.7%
Data source: Social Security Administration.
On the bright side, the opposite scenario is happening this time around. Social Security benefits will get an 8.7% COLA in 2023 — the fourth-largest COLA in the history of the program — but the CPI-W has now dropped for three consecutive months, clocking in at 8.5% in September. If that trend continues, the 2023 COLA will overestimate the impact of inflation, just as the 2022 COLA underestimated the impact of inflation. That means retired workers could end up with some extra cash next year.
Social Security’s COLA in 2023 is on pace to overestimate the impact of inflation on retirees
There is another angle to consider. Many experts believe the CPI-W does a poor job of quantifying the impact of inflation on retired workers. That’s because the CPI-W is based on purchases made by office workers and hourly wage earners, but the spending patterns of workers don’t necessarily reflect the spending patterns of retirees. For that reason, many experts believe the Consumer Price Index for the Elderly (CPI-E) is a better measure of inflation for retired workers. The CPI-E is based on purchases made by individuals aged 62 and older.
The chart below shows how inflation (as measured by the CPI-E) has increased in each quarter over the past year.
Time Period
Increase in CPI-E
Q4 2021 (October through December)
6.1%
Q1 2022 (January through March)
7.2%
Q2 2022 (April through June)
8%
Q3 2022 (July through September)
8%
Data source: Bureau of Labor Statistics.
Based on the data above, an 8.7% COLA in 2023 may overestimate the impact of inflation on retirees by an even wider margin than the CPI-W suggests. Of course, the actual impact depends entirely on where inflation goes from here. But if the CPI-E continues to decelerate, Social Security benefits could regain some (if not all) of the buying power lost over the past year, and that would certainly help retired workers battle inflation.
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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs. The Motley Fool has a disclosure policy.
