Millions of retired seniors bank on Social Security as a major source of income. And thankfully, benefits are eligible for an annual cost-of-living adjustment, or COLA, the purpose of which is to help seniors maintain their buying power from year to year.
For a long time, Social Security COLAs were notoriously stingy. But in 2022, seniors got a 5.9% raise -- their largest in decades. And due to rampant inflation, some experts are calling for an even larger COLA for 2023.
In fact, recent estimates have indicated that seniors could see their benefits increase by almost 11% in 2023. But here's why that may not happen.
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It's all about inflation
It's fair to assume that 2023's Social Security COLA will exceed the 5.9% raise seniors received in 2022. But is a COLA of nearly 11% really on the table? That's more questionable.
See, those COLAs are calculated each year based on third-quarter inflation data from the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. But because we've only recently kicked off the third quarter, it's hard to get a handle on what inflation levels will look like for July, August, and September.
Meanwhile, high levels of inflation are largely driven by consumer demand. In recent months, inflation has soared because consumers have had money to spend at a time when supply chains were still battered. But we could soon see a dip in consumer spending, and a significant one at that.
In an effort to cool inflation, the Federal Reserve has been hiking up interest rates, making it more expensive for consumers to borrow. And those rate hikes probably aren't done for the year.
We've already seen mortgage rates rise sharply since the beginning of 2022. If credit card and other loan interest rates increase at a rapid clip, it could easily cause a pullback in consumer spending. From there, supply could catch up with demand, and prices could start to come down. And if prices fall to a notable degree, it could result in a lower COLA for 2023 than what some may already be anticipating.
Should seniors bank on a large COLA?
It's fair to assume that next year's COLA will surpass the 5.9% boost Social Security recipients got going into 2022. But it's definitely premature to anticipate a COLA of nearly 11%.
Ultimately, seniors will need to sit tight until October, as that's when COLAs are commonly announced (remember, the Social Security Administration needs time to assess third-quarter inflation data). But those anticipating a huge boost may want to keep their expectations in check and start conserving cash, or continuing to do so, in case that number disappoints, as it has many times in the past.
It's also worth remembering that extraordinarily large COLAs aren't necessarily a good thing, because they're indicative of high levels of inflation. So if 2023's COLA falls short of current expectations, it could mean that the cost of existing is finally reaching a more moderate, manageable level.
