Starting in January, some 70 million Americans will see a welcome change in their Social Security payments as benefits will increase by more than they have in 41 years.
Social Security benefits will increase by 8.7%, or about $146 per month, on average, to $1,827 per month, due to the annual cost-of-living-adjustment (COLA). The increase is tied to the rise we have seen this year in the Consumer Price Index (CPI), which measures inflation. It is the largest COLA increase since 1981 when monthly benefits rose 11.2%. The year prior, in 1980, they increased 14.3%.
But there is another financial benefit that seniors should see in 2023, as Acting SSA Commissioner Kilolo Kijakazi pointed out recently.
Social Security benefits up, Medicare premiums down
“Medicare premiums are going down and Social Security benefits are going up in 2023, which will give seniors more peace of mind and breathing room. This year's substantial Social Security cost-of-living adjustment is the first time in over a decade that Medicare premiums are not rising and shows that we can provide more support to older Americans who count on the benefits they have earned,” Kijakazi said.
As the acting commissioner referenced, seniors will see their Medicare premiums go down in 2023, starting in January. This is a rare occurrence, as it has happened only a few times over the past 50-plus years, the last being in 2012. The Centers for Medicare and Medicaid Services (CMS) said the standard monthly premium will be $164.90 for 2023, down $5.20 from $170.10 this year. The annual deductible will be $226 in 2023, down $7 from 2022.
The decrease is due in part to the fact that projected expenditures on certain medications in 2022 came in lower than anticipated, so the savings are being passed on.
The higher Social Security benefits and lower Medicare premiums should offset some of the hardships that seniors have faced in paying higher prices for everything from gas to groceries. But is it enough?
According to a recent survey by The Motley Fool of 750 retired Americans, 85% said they have noticed the effects of inflation on their daily expenses and that it is stretching their budget. Further, 55% of those surveyed said the 8.7% COLA increase is not enough while roughly 40% said it was about right.
Inflation is trending lower
Retirees should know that inflation rates have been gradually dropping. In November, inflation rose 7.1% year over year, which is historically very high, but down from a high of 8.5% in August.
The Federal Reserve Board has been aggressively raising interest rates to bring down inflation. On Dec. 14, the Fed raised rates again, increasing the federal funds rate by 50 basis points to the 4.25% to 4.5% range. This was a slightly lower rate of increase than the past four meetings, when rates jumped 75 basis points in each.
“The committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” according to a statement by the Fed's Federal Open Markets Committee (FOMC).
So, when will inflation return to the Fed's preferred 2% rate? The Federal Reserve makes such predictions during every FOMC meeting and at the latest meeting this week, the consensus called for inflation to hit 3.1% by the end of 2023.
The Fed uses the personal consumption expenditures (PCE) as its preferred measure of inflation — and it expects that number to be at 5.6% at the end of 2022, 3.1% by year-end 2023, 2.5% in 2024, and 2.1% in 2025. These are just projections and they obviously can — and usually do — change. In fact, in September, the Fed projected PCE inflation to be at 2.8% at the end of 2023, so expectations went up since then. But ultimately, it shows that inflation should be moving lower in 2023.
Lower inflation, combined with the 8.7% monthly benefits increase, should give retirees a little more buying power in 2023 than they have now, if inflation does indeed decrease. It could make up for 2022, when many retirees lost buying power as benefits increased 5.9%, which turned out to be lower than the rate of inflation.
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