Many seniors today rely heavily on Social Security to make ends meet. And that's not necessarily a great thing.
The problem with Social Security is that there's a lot of misinformation surrounding it. And one common myth is that benefits are designed to replace workers' pre-retirement paychecks in full.
In reality, for the average earner, Social Security will replace about 40% of pre-retirement earnings. And most seniors need roughly twice that sum to live comfortably.
It's for this reason that many Social Security recipients eagerly await news of a cost-of-living adjustment, or COLA, each year. Those who get most or all of their income from the program may be banking on a large raise for 2023 in particular given the way inflation has been soaring this year.
In that regard, there's some good news. We're only one month away from the Social Security Administration's 2023 COLA announcement. And once that information hits, seniors will have a better sense of what their benefits will look like next year. The bad news, though, is that even a giant raise may not leave beneficiaries in a more financially secure position.
Why COLAs are announced in October
Social Security COLAs are based on third quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures fluctuations in the cost of consumer goods. Specifically, what happens is that CPI-W readings from the third quarter of the year are compared to those of the previous year. If the average value rises from one year to another, benefits get a boost.
Right now, it's too soon to say what next year's Social Security COLA will look like because we're not through with the third quarter of the year. But September's CPI-W data should be available on October 13. And once that information is available, the Social Security Administration should be able to calculate and announce a COLA for 2023.
Next year's COLA could be huge
This year, seniors got a 5.9% COLA, and that was the largest increase benefits had gotten in decades. Based on recent estimates, it's looking like 2023's COLA will be even more significant. Some estimates, in fact, have even called for a boost of almost 11%, though that may be pushing it.
Of course, many seniors are banking on a giant raise for 2023. But it's important to remember that Social Security benefits only go up substantially when inflation dictates that that sort of raise is necessary.
As such, a large boost for 2023 won't necessarily give seniors more buying power. In a best-case scenario, they'll break even -- meaning, they'll get enough of a raise to maintain their buying power but not gain any.
In fact, it's easy to argue that a large Social Security raise is not even a good thing, because it means that living expenses are just that much higher. And so no matter what 2023's COLA ends up looking like, a lot of seniors could still wind up cash-strapped in the coming year just as they are right now.