By 2023, retirees that receive Social Security could see their benefits increase a lot. The Social Security program provides a cost-of-living adjustment (COLA) every year to account for inflation so retirees don't lose their purchasing power.
This year, benefits increased by 5.9% thanks to the COLA. In 2023, The Senior Citizens League estimates the COLA might be 8.7%, which would be the largest increase in roughly four decades.
While we don't know exactly where inflation will land in September, I am still expecting retirees to see at least an 8% increase in their Social Security benefits next year. That would mean retirees end up seeing a more than 14% increase to their benefits between 2021 and 2023. But is this enough to keep up with the significantly higher cost of living? Let's take a look.
What a difference two years makes
The the COLA is calculated based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which tracks the prices on a basket of common consumer goods and services.
However, this is a subset of the more commonly tracked Consumer Price Index for All Urban Consumers as the CPI-W is based on households where more than 50% of income is earned from clerical jobs or wage occupations. The CPI-W only represents about 28% of the U.S. population.
There is controversy in using the CPI-W, because some argue it does not reflect what most people over the age of 62 claiming Social Security are spending the majority of their money on.
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As a result, it's easy to see how the COLA may not be keeping up with the higher cost of living for seniors. For instance, Medicare premiums jumped significantly this year with the basic monthly premium rising 14.5%. Luckily, most Medicare premiums aren't expected to change too much in 2023, but even then, the rise in Medicare premiums this year will be enough to eclipse two years of COLA adjustments for 2022 and 2023.
The Consumer Price Index for Americans age 62 years and older -- which tracks the prices of food, housing, apparel, transportation, medical care, recreation, education, and other common services for seniors -- rose more than 7.9% between Aug. 2021 and Aug. 2022.
Over the long term, the disparity between COLAs and the cost of living is even worse. According to a 2022 study, the nonpartisan Senior Citizens League estimates Social Security benefits have lost 40% of their purchasing power since 2000. Additionally, while COLAs have grown benefits by 64% since 2000, seniors have seen their expenses rise by more than 130% as of March 2022.
That's because the price of common items and necessities for seniors have skyrocketed. Since 2000, the cost of out-of-pocket prescription drugs has risen 285%, according to the Senior Citizens League study, while other expenses such as homeowners insurance and propane gas were up 163% and 195%, respectively.
Are COLA adjustments enough?
Despite the fact 2022 and 2023 COLAs are set to be the largest in four decades, many critical retiree expenses are rising even more quickly, meaning COLAs have not been able to keep up with the higher cost of living.
This is a long-term issue that two years of better COLAs will not be able to address, and some lawmakers have proposed to change the way the COLA is calculated for Social Security. For now, though, it will likely remain an ongoing challenge for retirees who depend on their benefits.
