This month, retirees across the country are going to get a bigger Social Security check. These larger checks will continue all year and are the result of a 5.9% cost of living adjustment (COLA) -- the biggest one in decades.
But while you may be happy to see more money deposited into your bank account by the Social Security Administration, don't get too excited when that first check comes and the amount appears to be larger on paper.
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Here's why Social Security's big raise this year isn't something to be excited about
While getting more money from the Social Security Administration seems nice, it's not the actual dollar amount of your benefit check that matters -- it's what you can buy with it that counts. And, sadly, despite the huge raise retirees are getting, their buying power very likely may fall this year anyway.
See, Social Security cost of living adjustments are calculated based on changes on the Consumer Price Index for Urban Wage Earners and Clerical Workers. (CPI-W). The raise is determined based on how much CPI-W data during July, August, and September shows prices increasing compared with the same three months during the prior year.
When the 2022 COLA was calculated, it showed a 5.9% increase in prices year over year -- hence the 5.9% raise seniors received. The only problem is, that calculation was based on a snapshot in time and inflation has continued to surge since then.
More recently, a different price index -- the Consumer Price Index for All Urban Consumers (CPI-U) -- showed that there was a 6.8% jump in prices in November 2021 compared with the prior year. And this is likely to rise to 7% in December.
If you get a 5.9% raise and prices are up 7%, your "benefit bump" doesn't actually give you any more to spend. Instead, you end up losing ground because your income isn't going up as fast as prices are rising. You won't be able to buy more -- your money won't stretch as far as it did in the past.
How to cope with rising inflation
It's undoubtedly bad news that your big Social Security benefits bump isn't actually a raise at all. But as long as you recognize this reality, you can take steps to mitigate the effects of inflation and avoid the financial struggles that often result from coping with rising prices on a fixed income.
Some of the different steps you can take to deal with inflation include the following:
- Postpone large purchases: If you don't need to buy a car, do home improvement projects, or make other big purchases right now, don't do it. Wait until the cost of goods and services stabilizes. This is especially important if the items you'd be purchasing are affected by current ongoing supply chain crises or chip shortages.
- Make sure you have the right investment mix: A solid investment portfolio can help you to avoid losing ground since you can earn returns that hopefully beat inflation.
- Look for substitutions for high-priced items: If a particular type of food, such as beef, sees fast-rising prices, then consider switching to less expensive items such as a more plant-based diet.
- Keep energy costs down: Insulating your home, adjusting your thermostat, and making a point to shut off lights and do high-power activities during off-peak hours can help you keep energy costs down.
By taking these steps, hopefully you can stay within your budget -- especially with your larger Social Security raise -- even as prices continue skyrocketing.
