Social Security retirees can expect to see a benefits increase in 2023. The amount of benefits paid out goes up in most years, so the fact that a Cost of Living Adjustment is coming probably won't be a big surprise.
What could be shocking, though, is just how big the annual raise is next year -- especially relative to how much all current retirees have received throughout the years.
Social Security's 2023 raise could be huge
The 2023 Social Security raise won't be announced until October of 2022. But early evidence suggests that the raise will be the largest one that seniors have seen since 1981.
In fact, a new analysis from the non-partisan Committee for a Responsible Federal Budget found that the benefits increase could be as much as 10.8%. That estimate is based on inflation continuing to increase at the current pace. A raise of this size would come as a huge shock to many seniors, given that the 2022 benefits increase was 5.9% and the 2021 increase was just 1.3%. No benefits increase has been close to comparable since the 11.2% raise retirees experienced back in 1981, which few of today's retirees are likely to remember.
Of course, there's no guarantee that the 2023 COLA will be quite this large, as it is possible inflation will slow. However, the Committee estimated that even if prices stopped rising entirely during the rest of 2022, seniors would still get a raise of around 7.3% next year. Even this more-conservative estimate would put the Social Security benefits increase well above the amount most current retirees have seen since beginning to get benefits.
Why are retirees going to get so much extra money?
If you're wondering why seniors are in store for such a big raise, the unfortunate answer is that because a huge increase in Social Security checks is necessary to help ensure retirees are still able to maintain their standard of living.
Social Security's Cost of Living Adjustments are intended to help ensure that benefits keep pace with inflation. As the cost of goods and services goes up over time, each dollar buys less. Since seniors won't increase their income by getting raises from their employers or finding new, better-paying jobs, their Social Security benefits must go up so they can afford to buy the same amount of goods and services once prices have moved higher.
Because the COLA is intended to make sure seniors can keep their buying power steady, the annual benefits increase is determined by looking at changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When this price index shows costs are increasing in the third quarter of the year compared with the prior year, retirees are entitled to a benefits bump equal to the percentage increase in costs.
All of this means retirees won't have "extra" money, despite a huge benefits increase. They will have bigger checks, but they will buy the same amount of goods and services -- or less, if inflation continues to increase after the COLA is calculated for the year. Retirees should be aware of the big raise that's coming so they aren't shocked by it -- and should make sure to think about the impact of such high inflation on their overall financial pictures.