High inflation has become a serious concern for many Americans. In July, the consumer price index (CPI) soared 8.5%, marking the 17th consecutive month in which inflation has outpaced the 2% target set by the Federal Reserve. Rising food and energy prices have been the primary drivers of that trend, and consumers are feeling the impact at grocery stores and gas stations.
Given the severity of the situation, Social Security retirement benefits are on pace to see a monster increase next year. Here's what you should know.
Next year could bring a big cost-of-living adjustment
Every year, the Social Security Administration evaluates the cost of living, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), to determine whether a cost-of-living adjustment (COLA) is necessary. In other words, COLAs ensure that Social Security benefits keep pace with inflation.
How are COLAs calculated? The CPI-W from the third quarter (July through September) of the current year is compared to the CPI-W from the third quarter of the last year in which a COLA became effective. If there is an increase, an adjustment -- equal to the percentage of the increase -- is applied to the Social Security benefits payable in January of the next year.
That means COLA information for 2023 won't be finalized until October 2022, because CPI-W data for August and September is not yet available. But retirees and future retirees can still examine the underlying trends using data available today to get a sense of the COLA that could be applied to benefits paid out next year.
In July 2022, the CPI-W clocked in at 292.219, which is 8.9% higher than the CPI-W of 268.421 from the third quarter of 2021. That means Social Security beneficiaries are on track to see an 8.9% COLA in 2023, easily topping the 5.9% COLA in 2022. In fact, it would be the largest adjustment since the 11.2% COLA in 1981.
Retirees could see an extra $148 per month
In July, retired workers received an average monthly benefit of $1,670.95, according to the Social Security Administration. But that figure would rise to $1,819.66 after an 8.9% COLA, leaving the average retiree with an extra $148.71 each month.
It's worth noting that any COLAs put in place after you reach age 62 (the age of eligibility for Social Security) will be added to your benefit even if you don't get benefits until later. In other words, future retirees won't miss out on the potentially massive COLA in 2023 if they choose to delay Social Security beyond next year. Waiting as long as possible to claim benefits is still the best way to maximize the monthly payout.
The chart below illustrates that idea. It is based on an individual born in 1960, meaning their full retirement age is 67 years old, and it assumes a full benefit of $1,670. If that individual claims benefits at age 62, the monthly payout would drop by 30%. But if that individual waits until age 70 to claim benefits, the monthly payout would increase by 24%.
Age Claiming Social Security
62 years old
67 years old
70 years old
As a final point, the idea of a massive COLA in 2023 sounds great, but retirees may not feel like they got a raise at all. COLAs simply keep benefits in line with inflation, and inflation just hit a 40-year high in June. In that context, no one should be surprised if 2023 brings the largest COLA in the last 40 years.