Social Security’s Biggest Raise Since 1982 Comes With Extra Good News for Retirees

Many retired workers have found themselves in a difficult financial position. The stock market has sold off sharply in response to recession fears, erasing nearly $3 trillion from individual retirement accounts (IRAs) through the first three quarters of 2022. Meanwhile, inflation reached its highest level in four decades last year, driving double-digit increases in the prices of gasoline, groceries, and monthly utilities.

Unfortunately, the 5.9% cost-of-living adjustment (COLA) applied to Social Security benefits in 2022 failed to keep pace with rising prices, meaning benefits lost buying power. But retired workers have good reason to believe the situation will improve this year. Social Security benefits will get an 8.7% raise in 2023 — the largest COLA since 1982 — and that raise comes with an important bonus.

Image source: Getty Images.

The problem with Social Security’s 5.9% COLA in 2022

Inflation erodes the purchasing power of money over time. For that reason, $100 will buy fewer goods today than it did five years ago, and far fewer goods that it did a few decades ago. That slow loss of purchasing power is a problem for retired workers on Social Security, and COLAs are the solution.

Specifically, Social Security checks get an annual COLA to protect benefits from inflation, and those COLAs are calculated based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in the third quarter of each year. For instance, the CPI-W increased 5.9% in the third quarter of 2021, so a 5.9% COLA was applied to benefits in 2022.

However, as noted earlier, the 2022 COLA actually failed to protect the buying power of benefits, and the chart below illustrates what went wrong. Inflation (as measured by the CPI-W) has increased far more quickly than 5.9% over the past year.

Month (2022)

Inflation (Change in CPI-W)























Data source: Bureau of Labor Statistics. Note: inflation reflects the year-over-year change in the CPI-W.

Inflation data for December is not yet available, but the CPI-W increased by an average of 8.7% through the first 11 months of 2022. That means the 5.9% COLA underestimated the rate of inflation by 2.8 percentage points, which effectively translated into a pay cut for retired workers and other Social Security beneficiaries.

To add context, the average monthly benefit for retired workers was $1,660.90 in January 2022, but if the COLA had been 8.7% — the amount needed to fully offset inflation — that figure would have been $1,704.82. That means the average retired worker should have received an additional $43.92 per month in Social Security benefits in 2022, which is equivalent to $527.04 for the full year.

The extra padding to Social Security’s 8.7% COLA in 2023

Fortunately, inflation is trending downward. As the chart in the previous section illustrates, the CPI-W has decelerated for the last five consecutive months, and the Federal Reserve is working to keep that trend in motion by shrinking its balance sheet and raising its benchmark interest rate.

Assuming the CPI-W continues to slow, the 8.7% COLA in 2023 will actually overestimate the impact of inflation, restoring a portion (or more) of the buying power Social Security benefits lost in 2022. That means retired workers may wind up with a little extra cash this year, which would be a nice change of pace after battling rising prices over the past year.

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