Last October, seniors on Social Security got word of a 5.9% cost-of-living adjustment, or COLA, for 2022. The news was generally met with excitement, since that 5.9% raise represented the largest boost benefits had seen in years.
Meanwhile, we're only about a month and a half away from 2023's COLA announcement, which should be unveiled in mid-October this year. Initial estimates are calling for an even larger COLA in 2023 due to rampant inflation. But is that something seniors should actually hope for?
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A large Social Security bump isn't actually great news
Given the way living costs have risen this year, it's easy to see why so many retirees want a large COLA for 2023. But if a giant raise does come through, they shouldn't be fooled into thinking they'll end up with a lot more buying power.
The formula used to calculate Social Security COLAs often fails to account for costs that are specific to seniors, like healthcare. So the raises they get often fall short in terms of helping them keep up with rising living costs.
Furthermore, say a 10% COLA comes through for 2023. All that really means is that seniors will see their benefits rise by 10% to account for the fact that general living costs are 10% higher. So in that situation, Social Security recipients won't actually come out ahead financially.
When will we be done with rampant inflation?
That's the big question, isn't it? Inflation has been soaring since last year, fueled in part by an excess of consumer demand spurred by supply chain issues and stimulus policies, among other factors. This year, federal stimulus aid has not been on the table, but consumer demand has continued to exceed supply.
The Federal Reserve is hoping to narrow that gap by implementing interest rate hikes. The logic is that if borrowing gets more expensive, consumer demand will start to wane, thereby easing the pressure on supply chains.
We might see inflation levels dip modestly during the latter part of 2022. But that doesn't mean we'll be back to moderate levels anytime soon. So those on Social Security should expect living costs to stay high for quite some time.
Meanwhile, next year's Social Security COLA will be based on third-quarter inflation data -- hence the October announcement. If inflation starts to moderate in October or beyond, it won't impact the raise for 2023. An ideal situation would actually be for inflation to stop dipping at that point so that seniors can get a large raise and then see their living costs decrease modestly. But no one should expect rampant inflation to just disappear anytime soon.
All of this really underscores the problem with relying too heavily on Social Security for retirement income. COLAs, even when they're larger, don't help seniors increase their buying power. Those who want more financial freedom later in life need to make sure they enter retirement with healthy nest eggs to tap or line up other income sources, like part-time work, that aren't dependent on a specific inflation-related formula like COLAs are.
