In late 2021, seniors on Social Security got some pretty good news -- their benefits would be going up by 5.9% in 2022, representing their largest raise in decades. Meanwhile, the start of 2023 has brought about severe spikes in inflation. And that could set the stage for an even higher bump in benefits come 2023.
Will Social Security benefits go up even more?
In February, the Consumer Price Index for all Urban Consumers (CPI) rose 7.9% on an annual basis, marking its steepest annual gain in over 40 years. If this trend persists, then seniors on Social Security could see their benefits rise even more next year.
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To be clear, though, it's too soon to predict what 2023's cost-of-living adjustment (COLA) will look like. The reason? COLAs are based on CPI data from the third quarter of the year (and actually, Social Security uses a slightly different CPI -- the CPI-W -- to determine how much to boost benefits). And while there's a strong chance rampant inflation will persist throughout 2022, inflation levels could also somehow subside by summertime.
But still, either way, there's a strong possibility that Social Security benefits will get a generous raise in the new year. Whether that's something to celebrate, though, is a different story.
Seniors are already losing buyer power
At first, 2022's 5.9% COLA seemed like a great thing for seniors. But so far, beneficiaries are already losing buying power because the rate of inflation is outpacing their COLA, which they're limited to for the entire year.
If high levels of inflation persist, seniors could end up seeing a COLA in the 7% range in 2023. But that may not do them much good. Chances are, if that high a COLA comes through, it will simply be wiped out by higher living costs.
Furthermore, Medicare costs have been rising steadily, and that's done a good job of eroding COLAs in recent years. If Medicare Part B premiums increase a lot in 2023, seniors could end up in a serious financial crunch even if their COLA is extremely generous.
Don't rely on Social Security alone
It's too soon to predict exactly what raise seniors on Social Security will be in line for in 2023. But it's also fair to say that no matter what it is, it probably won't be enough.
In fact, the limited power of COLAs should be reason enough to motivate today's workers to not rely too heavily on Social Security in retirement, but rather, take steps to build savings of their own. As it is, Social Security will only replace about 40% of the average worker's pre-retirement wages. And so retiring on those benefits alone could set the stage for a world of financial hardship.
Contrary to what some might believe, it doesn't take a lot of money on a monthly basis to build a solid retirement nest egg. Contributing $300 a month to an IRA or 401(k) plan over 30 years could result in a savings balance of about $408,000, assuming that money is invested at an average annual 8% return (a reasonable assumption based on the stock market's historical performance). That's a great way to avoid a scenario where inadequate COLAs result in an inability to make ends meet.
