Inflation has taken a toll on millions of Americans, and many retirees living on a fixed income have been hit hard. Fortunately, Social Security's cost-of-living adjustment (COLA) could make it a little easier to pay the bills. The annual COLA is designed to help your benefits keep up with inflation and maintain buying power over time.
There's been a lot of buzz about the upcoming COLA and how it could affect retirees. Here's what you need to know right now.
1. Next year's adjustment could be historic
When inflation is soaring, it often results in a higher-than-average COLA. For example, after inflation began increasing near the end of 2021, seniors received a 5.9% adjustment -- which is significantly larger than the normal 2% to 4% raise in years past.
Because of the record-breaking inflation we've seen so far in 2022, there's a good chance the upcoming COLA will be historic, too.
We won't know the official number until October, as that's when the Social Security Administration will make the announcement. But a new report from The Senior Citizens League estimates it could fall between 9.3% and 10.1%, depending on how inflation fares over the next couple of months.
2. The COLA will affect many areas of Social Security
A higher-than-average COLA means seniors could receive hundreds of dollars more per month in benefits. But it will affect other areas of Social Security, too.
For example, if you continue to work after claiming Social Security, you may get to keep more of your checks. If your income surpasses the annual earnings limit, a portion of your benefits will be withheld until you reach your full retirement age. With a higher COLA, that earnings limit will likely increase, which means you can earn more without having your checks reduced.
A higher COLA will also increase the maximum benefit amount. Currently, this limit is $4,194 per month. But it could potentially increase by hundreds of dollars per month in 2023.
3. Your benefits won't necessarily gain buying power
While a record-breaking COLA is a good thing for seniors, there is a downside.
Historically, Social Security has struggled to keep up with inflation, even with annual COLAs. In fact, over the last two decades, it's actually lost around 40% of its buying power due to inflation, according to The Senior Citizens League.
Depending on where the COLA for 2023 falls and how inflation fares throughout the rest of the year, it might be enough to help seniors maintain buying power. However, it's not necessarily the raise that many retirees may be expecting, as it likely won't increase your discretionary income.
To be clear, next year's historic COLA can still go a long way toward making retirement more affordable for seniors, and it's still something to look forward to. It's wise, though, to keep your expectations in check so that you're as prepared as possible for all the changes on the horizon.