In 2023, Social Security retirees will likely encounter something that no senior has encountered in the past 41 years. The anticipated cost of living adjustment (COLA) would result in the largest increase in benefits in more than four decades.
This change appears to be beneficial for older Americans, but this is not the case. To comprehend why, it is helpful to know why this change will take place next year.
In 2023, retirees can anticipate a significant change in their benefit.
In 2023, it is likely that retirees will see a significant increase in their monthly payments.
According to the Senior Citizens League, senior benefits could increase by 8.6 percent in the coming year. This provision would become effective in January 2023. It would result in an increase of $142.50 per month, or $1,710 per year, for retirees currently receiving the average monthly benefit of $1,657.
This would be the largest monthly increase in Social Security benefits since 1981, when Americans received a raise of 11,2 percent. And it significantly exceeds the raises seniors have received in recent years, which ranged from 0% in 2016 to 5.9% in 2022.
Here are the reasons why this change is bad news for seniors:
It may appear to be good news that seniors are receiving the largest increase in benefits in more than four decades. However, the reality is that it is not beneficial for seniors or anyone else.
See, the COLA is calculated annually based on the consumer price index, which indicates the rate of price inflation from year to year. In other words, it is based on inflation, so a large increase indicates that the prices of goods and services have risen significantly. Therefore, while retirees will receive more money on paper, their larger checks will not increase their purchasing power. In reality, their funds are unlikely to go as far due to two key factors.
Due to the structure of the COLA formula, the first major issue is that Social Security raises have not kept pace with the actual increase in spending that older Americans have experienced over time. The shortfall is substantial, with the Senior Citizens League estimating that benefits’ purchasing power has decreased by 40% since 2000.
The second issue is that the majority of senior citizens rely on both Social Security and savings to make ends meet. And inflation wreaks havoc on savers, as the purchasing power of seniors’ invested funds decreases as prices rise. Due to the fact that seniors must typically invest conservatively to avoid excessive risk of loss, their returns may not be sufficient to prevent significant ground loss when inflation is rising so rapidly.
The Social Security Administration has not yet announced the increase in benefits for 2023, and because it is based on data from the third quarter of the year (July to September), it is still possible that the increase will change. All evidence indicates, however, that inflation will be a persistent issue in the coming months, so retirees should begin preparing now for the possibility that their larger Social Security checks will not cover rising prices over time.