It's hardly a secret that these days inflation is wreaking havoc on a lot of people's budgets. With everything from gas to utilities to apparel to groceries costing more, many consumers are struggling to make ends meet.
Seniors are in a similar boat. Many retirees who get the bulk of their income from Social Security are having a hard time keeping up with living expenses, and that's coming on the heels of the program's most generous cost-of-living adjustment (COLA) in decades.
In fact, recent estimates indicate that seniors on Social Security may be in line for an 8.6% COLA in 2023. Of course, it's too soon to say with certainty what next year's COLA will look like because that number is based on inflation data from the third quarter of the year, and, well, we're just not there yet.
But either way, it seems likely that seniors on Social Security will see their benefits rise substantially in 2023. Whether that's a good thing, though, is up for debate.
Why seniors shouldn't hope for a giant raise
There are two types of raises employers commonly give out. One is a cost-of-living raise, and the other is a merit raise. Merit raises are based on performance and tend to be the more generous of the two. After all, the point of a cost-of-living raise is to simply increase wages just enough to make it possible for workers to keep up with rising expenses, whereas a merit raise might actually help a given employee get ahead financially.
In the context of Social Security, there's no such thing as a merit-based COLA. Rather, COLAs are based on inflation data, and their purpose is to help seniors retain their buying power as living expenses go up.
But when COLAs rise substantially, it's only because living costs are doing the same. And often, even when Social Security gets a nice COLA, it's not really enough to help seniors stay afloat.
That's why Social Security recipients really shouldn't want a large COLA for 2023. If that 8.6% raise comes to be, chances are, rising living costs will make it so that seniors are still behind financially even once their benefits go up.
Part of the reason for that is the way COLAs are calculated. Simply put, COLAs are based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But the CPI-W isn't really reflective of the costs seniors commonly face.
For years, senior advocates have proposed using a senior-specific index -- the CPI-E, or Consumer Price Index for the Elderly -- to calculate COLAs and make them more equitable. But that idea has yet to gain traction to the point where it becomes reality.
Seniors have long been losing buying power
Seniors on Social Security have been steadily losing buyer power since 2000. And a large COLA for 2023 won't necessarily do much, or anything, to address that issue. That's why hoping for a large COLA really doesn't pay. Instead, what seniors should hope for is that lawmakers change the way those raises are calculated to begin with.