Social Security can make for a more financially secure retirement, and many older adults rely heavily on benefits to make ends meet. Any changes to the program could then make a big difference in your pension.
Next year will be a landmark year for Social Security seniors as a drastic change is underway. While it will result in bigger monthly checks, it’s not all good news. Here’s what you need to know about what’s to come.
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A record-breaking COLA . may be coming
Later this year, the Social Security Administration will announce next year’s cost of living adjustment, or COLA. This adjustment is designed to ensure that benefits keep pace with naturally rising inflation, so that your monthly checks maintain their purchasing power.
Most years, COLA will fall somewhere between 2% and 4%. Last year, seniors received a massive 5.9% increase to account for rising inflation in 2021. But in 2023, the COLA will be record-breaking.
While we won’t know the official COLA until October, the expected figure is around 9.6%, according to estimates from nonprofit The Senior Citizens League. Even if inflation slows for the rest of the year, the expected COLA for 2023 will still be around 9.3%. If inflation rises, it could potentially rise to 10.1%
That will be the highest COLA since 1981, and the average retiree will see an increase of about $160 a month in 2023 as a result of this unusually large adjustment.
The less good news
A record-breaking COLA may sound like good news for seniors, especially as the cost of everyday goods and services continues to rise. While a higher COLA is desperately needed to make inflation more bearable, it’s not exactly the hike many people expect.
COLAs are only meant to help Social Security to maintain purchasing power, not increase. Also, historically, these adjustments have performed poorly to keep up with inflation.
Example: Even with a huge 5.6% increase last year, inflation has risen about 8.5% in the past 12 months, according to the most recent data from the Bureau of Labor Statistics. If seniors get a 9.6% pay increase in 2023, it will barely keep pace with actual inflation.
Over time, Social Security steadily loses purchasing power. In fact, benefits have lost about 40% of their purchasing power since 2000, according to The Senior Citizens League — and that’s with annual COLAs.
To be clear, an above-average COLA in 2023 will go a long way toward helping seniors afford daily necessities. But it won’t go much further than that. So it makes sense to be realistic with your expectations as we enter 2023.