Millions of Americans anxiously look forward to cost-of-living adjustments (COLAs) from Social Security each year. These COLAs can make a big difference in household finances for retirees.
We'll have to wait to find out exactly how much the COLA increase will be for 2023. But the Committee for a Responsible Federal Budget (CRFB), a nonpartisan, nonprofit organization that focuses on issues affecting U.S. fiscal policy, recently projected that Social Security could give recipients an adjustment of nearly 11% next year.
Could such a hefty Social Security increase be on the way in early 2023? Maybe. But here are three reasons you shouldn't count on it.
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1. The upper end of the estimated range
It's important to understand that the CRFB can only project what the potential Social Security COLA might be. The organization must make assumptions about the rate of inflation in determining its estimates.
The CRFB's latest analysis does project that the Social Security COLA for 2023 could be as high as 10.8%. However, that figure is at the upper end of the estimated range. And it assumes that inflation continues at the current levels.
But what happens if inflationary pressures largely evaporate? The CRFB thinks that the Social Security increase would be 7.3%.
The most likely actual cost-of-living increase for Social Security beneficiaries won't be on either the upper or lower end of the estimated range, according to the CRFB. Instead, it will probably be somewhere between those extremes.
2. Inflation could already be moderating
The assumption that inflation will continue unabated might already be in trouble. There are some signs that it could be moderating.
For example, commodity prices have fallen significantly over the past few weeks. Aluminum prices are the lowest they've been since 2020. Copper prices are at a one-year low. Most importantly, oil prices have declined.
Consumer spending also slowed in May. When consumers spend less, prices tend to fall. It's the law of supply and demand at work.
The housing market appears to be cooling as well. Combined with lower commodity prices and consumer spending, this could indicate that the sky-high inflation we've seen earlier this year could be less of an issue. If so, the Social Security COLA for 2023 won't be as high as it would otherwise be.
3. The Fed isn't finished
The Federal Reserve Board recently raised its benchmark interest rate by 75 basis points. That's the most aggressive rate hike in 28 years. But the Fed isn't finished -- more increases are likely on the way.
The Fed has one overriding goal with these hikes: Get inflation under control. Higher interest rates slow the economy. The positive benefit of this, though, is that prices don't go up nearly as much when demand is down.
These actions by the Federal Reserve matter for Social Security recipients because they can directly impact how big their COLA will be. If the Fed is successful in its fight against inflation, look for a COLA well below the CRFB's 10.8% projection.
A COLA pop is coming
At first glance, the prospects of a lower COLA might not seem like good news for Social Security recipients. However, it's important to remember that the adjustments are made to help address higher costs of living. A lower COLA means that Social Security checks can be stretched further due to lower prices.
Even if inflation subsides somewhat, though, a significant COLA should be on the way in 2023.
