If you are a retiree relying on Social Security benefits, you are probably aware that the amount of money you get can change from year to year. Specifically, in most but not all years, seniors get a Cost of Living Adjustment (COLA). Although this adjustment isn't a raise in the traditional sense, it does mean checks get bigger. As a result, many people are eager to find out exactly how much extra money they'll get in the upcoming year.
For those waiting to find out what 2023 will bring, here's when the data on Social Security COLAs will be revealed.
This is when seniors will find out about their Cost of Living Adjustment
Each year, the Social Security Administration announces the Cost of Living Adjustment in October. This means that in October 2022, retirees will find out how much their benefits are expected to go up in 2023.
Social Security's COLA is percentage-based. So, for example, in 2021, retirees received a 5.9% raise. As a result, once the COLA is announced, you will be able to get a good idea of how much your income will go up next year. If you are currently getting a $1,500 benefit, you would multiply that amount by the COLA percentage to determine your new monthly check amount. Last year, a person receiving $1,500 in benefits would have had their benefits increase by 5.9% of $1,500, or $88.50.
You won't necessarily see your full COLA reflected in your check, though, since Medicare premiums are typically deducted from Social Security payments. The Medicare premium increase, if any, is typically announced in November. So, after you get the data on the COLA and on the premium increase for Medicare, you can determine exactly how much extra you will get in your checks in 2023.
Why does the Social Security Administration announce the benefits increase in October?
Social Security did not just randomly pick the month of October to announce the benefits increase for the subsequent year. Instead, the raise is announced in October because that's when the data becomes available to determine how big the COLA will be.
Social Security COLAs are intended to help benefits keep pace with inflation, so they are determined using a specific formula that measures price changes. There is a consumer price index, called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-W measures how prices have changed on a basket of goods and services including food, energy, transportation, and housing. CPI-W data from the current year is compared with the data from the prior year to assess how much prices have gone up. The COLA is then based on this increase.
Not all CPI-W data is used, though. Only the third quarter matters, so the 2023 raise will be determined by comparing CPI-W information from the third quarter of 2022 to the third quarter of 2021. The third quarter consists of July, August, and September; the Social Security Administration compares the CPI-W for these crucial months to see how prices have changed. Once the Social Security Administration gets the numbers for all three of these months, it can calculate the COLA and announce the raise in October.
This year's benefits increase is expected to be a big one due to surging inflation, but while this may make retirees especially excited to hear about it, it's important to remember a large COLA isn't necessarily good news since it means inflation is high -- and that can affect a retiree's budget in many adverse ways.