In 2023, retirees on Social Security are likely going to experience something that no senior has in 41 years. The cost of living adjustment (COLA) they are on track to receive would result in the largest benefit increase in more than four decades.
This change sounds positive for older Americans, but in fact that's not the case at all. To understand why, it's helpful to know the reason this change will occur next year.
Retirees can expect a big change to their benefit in 2023
In 2023, retirees are likely to see a huge increase in their monthly checks.
According to the Senior Citizens League, seniors could get an 8.6% benefits increase next year. This would take effect in January 2023. It means that a retiree who is getting the average monthly benefit of $1,657 this year would see their payment increase by $142.50 per month, or $1,710 per year.
This would be the largest increase to monthly Social Security benefits since 1981, when Americans received an 11.2% raise. And it far surpasses the raises seniors received in recent years, which ranged from 0% in 2016 to 5.9% in 2022.
Here's why this change isn't good news for seniors
It may seem like great news that seniors are getting the biggest benefits increase in more than four decades. But the reality is that it's not a good thing for seniors or for anyone else.
See, the COLA is calculated each year based on the consumer price index, which shows how prices have increased from year to year. In other words, it's based on inflation, so a big raise means the costs of goods and services have gone up dramatically. So while retirees will get more money on paper, they won't enjoy any more buying power with their bigger checks. In fact, their money isn't likely to go as far for two key reasons.
The first big issue is that Social Security raises have not accurately kept pace with the actual increase in spending older Americans have experienced over time due to the way the COLA formula is structured. The shortfall is substantial, with the Senior Citizens League estimating that benefits have lost 40% of their buying power since 2000.
The second issue is that most older Americans rely both on Social Security and savings to help them make ends meet. And inflation hits savers hard, as the buying power of seniors' invested funds will also decline when prices go up. Since seniors typically need to be invested conservatively to avoid undue risk of loss, their returns may not be high enough to avoid losing substantial ground when inflation is surging so much.
The Social Security Administration hasn't yet announced the benefits increase for 2023 and since it's based on data from the third quarter of the year (July to September) things could still change. But all evidence suggests inflation will be a persistent problem in the months to come, so retirees should start preparing now for rising prices over time that their bigger Social Security check may not cover.