U.S. retirees may get a big benefit with the next Social Security cost-of-living adjustment for 2023.
Thanks to sharp inflation, U.S Social Security recipients should be getting a big raise in 2023.
According to the Senior Citizens League, which regularly tracks Social Security cost-of-living adjustments, next year’s figure will likely come in at 9.6%.
The league estimates the increase should average $159 a month, a substantial funding increase for Social Security recipients.
In 2022, Social Security recipients had received a record 5.9% COLA increase, the Senior Citizens League reported.
The U.S. Social Security Administration hasn’t confirmed those numbers and is several months away from reporting the official 2023 COLA adjustment.
The COLA calculation, officially called CPI-W, essentially looks at the prior year to determine the COLA increase in Social Security for the coming year.
“That means from the start, the factor used won’t likely be reflective of current inflationary conditions,” said Steve Parish, adjunct professor at the American College of Financial Services. “And there’s always a disagreement on whether the measures used are fair.”
Since the consumer price index is an aggregate of 8,018 basic indexes, the best that Social Security recipients can hope for is a rate that somewhat reflects what most people experience with inflation in any given year. But the COLA is still a positive.
“The thing to keep in mind is that very few fixed-income sources have a COLA feature built in,” Parish said. “Social Security is one of the best inflation-protected sources of income a retiree can hope for.”
Inflation Key to Setting COLA Rate Adjustments
There’s no question that inflation is pushing Social Security COLA adjustments to record heights.
“Inflation eased slightly in July but remains close to the 40-year high reached in June,” said Joseph DeMarkey, strategic business development leader at Reverse Mortgage Funding.
“Financial markets also remain volatile, and for retirees on fixed incomes, or those relying on interest income, this set of circumstances leaves them feeling financially vulnerable.”
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The most recent Social Security cost-of-living adjustment was the largest increase in nearly 40 years, DeMarkey noted. “Unfortunately, inflationary increases in health-care, housing and gas prices have already eroded the increase for most retirees,” he told TheStreet.com.
Additionally, the Federal Reserve has increased its key federal funds interest rate to its highest level since December 2018.
“This means that retirees will see higher rates on everything from credit cards to mortgages,” DeMarkey noted. “If a retiree has plans to right-size into a different home to save on mortgage costs, the higher interest rates will impact how much home they can afford.”
Consequently, seniors and retirees will likely view any significant COLA hike as welcome news.
“Half of U.S. seniors today rely on Social Security for [50% to 90%] of their income, so the major threat that inflation poses for them is the erosion it causes to the buying power of their monthly income,” said Chris Orestis, president pf the Retirement Genius.
“The only chance these people have to try to keep up with inflation is through the annual COLA increase.”
The News Isn’t All Bad
For inflation-battered U.S. seniors there’s also some good news on other fronts. For starters, today’s retirees own record amounts of home equity.
“While they may have less day-to-day purchasing power due to inflationary costs and financial-market uncertainty, their home equity can be used to insulate their retirement plans from these uncontrollable forces,” DeMarkey added.
Another piece of welcome news is that in 2023 Medicare intends to reduce the Part B premium increase that was put into place this year.
“Because the Part B premium is automatically deducted from Social Security, that will also add some more dollars to seniors’ pockets,” Orestis said.