Millions of retirees depend on Social Security as a crucial income source. That may especially hold true these days, given the way inflation is wreaking havoc on seniors' budgets.
Meanwhile, each year, Social Security undergoes its share of changes, some of which can work to seniors' advantage. And one such change that commonly gets announced in October could be essential to seniors' financial stability come 2023.
A big announcement that seniors are eagerly awaiting
Each year, Social Security benefits are subject to a cost-of-living adjustment, or COLA, the purpose of which is to help seniors maintain their buying power in the face of inflation. This year, Social Security benefits rose 5.9% in response to inflation levels in late 2021. But seeing as how living costs have soared even more in 2022, it's fair to assume that next year's COLA will be even more substantial.
However, seniors will need to wait until October to learn what their 2023 COLA will look like. Why so?
That COLA is based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W measures changes in a number of key goods and services on a year-over-year basis. Since COLAs are meant to help seniors keep up with inflation, it makes sense that they'd be pegged directly to an index that measures just that.
Of course, the problem with the CPI-W is that it doesn't necessarily reflect costs specific to seniors. The price of gas, for example, is a big driver of movement within the CPI-W, but it's something retirees may not spend as much money on as workers due to not having jobs to commute to. That's why many advocates have proposed changing the way Social Security COLAs are calculated and using a more senior-specific index to land on those numbers.
But for now, the CPI-W is the tool of choice for determining COLAs, and data derived from it during the year's third quarter is how next year's COLA will be established. And since that data won't be available until October, seniors will have to wait a while longer to see what sort of raise they'll be getting in 2023.
Should seniors hope for a large COLA?
Many Social Security beneficiaries are hoping for a giant COLA in 2023. But while that's understandable, large COLAs aren't necessarily a good thing, because they're indicative of the fact that living costs have gotten out of control.
If seniors wind up with a massive boost to their benefits in 2023, the best that raise will do is help them keep up with inflation. But it won't help them outpace it or gain a notable amount of buying power. That's why it's always best to have income sources outside Social Security.
Some seniors have nest eggs to tap or pensions that pay them regularly. But those who don't might struggle to make ends meet in the coming year -- even if 2023's COLA is by far the largest in decades.