Next month, the Social Security Administration will make a major announcement: The cost-of-living adjustment for 2023.
The cost-of-living adjustment, or COLA, is an annual bump in benefits designed to help Social Security keep up with inflation. You don't need to do anything to receive this boost, and all beneficiaries are eligible for it.
Next year's COLA is particularly important because it will likely be record-breaking. Seniors could receive hundreds of dollars more per month in 2023 -- but there's a catch.
Next year's COLA could be historic
The annual COLA generally mirrors the changes in inflation over the year. When inflation is increasing at a normal rate, the COLA generally falls at around 1% to 3% per year. But when inflation has been surging, the adjustment will be higher.
This year, for example, seniors received a whopping 5.9% increase. But after a year of record-breaking inflation, the COLA in 2023 will likely be significantly higher.
We won't know the official number until October, when the Social Security Administration makes its announcement. However, non-profit advocacy group The Senior Citizens League estimates that it could land at around 9.6%, which will be the highest COLA since 1981.
Even if inflation slows down between now and October, researchers predict that next year's COLA will still fall around 9.3%. If inflation soars, it could potentially reach a massive 10.1%, according to the report.
Why this isn't necessarily good news
While next year's COLA can go a long way toward helping seniors afford everyday necessities, it still may not be enough.
Millions of older adults rely on Social Security to make ends meet. In fact, nearly one-quarter of U.S. workers expect their benefits to be their primary source of income in retirement, according to a 2022 survey from the Transamerica Center for Retirement Studies.
However, even with yearly COLAs, benefits don't go as far as they used to. In fact, Social Security has lost around 40% of its buying power since 2000 as a result of soaring inflation, according to The Senior Citizens League.
This year alone, benefits have struggled to keep up with inflation. Despite a huge 5.9% COLA, the actual inflation rate hovered at around 8.5% over the past 12 months. If you're relying on Social Security to pay the bills, even a higher-than-average COLA may not be enough.
What can you do to prepare?
One way to help your money go as far as possible in retirement is to have realistic expectations. Social Security benefits were never designed to be a sole source of income, and their decreasing buying power means it will be harder to live on your monthly checks alone.
If you're able to save a bit more in your retirement fund, that can go a long way. But if you're already retired or can't afford to save more, it can help to simply understand the limits of Social Security. Next year's COLA will likely be historic, but it won't necessarily increase your discretionary income.
A higher COLA will provide much-needed relief for seniors battered by inflation, but it's important to keep your expectations in check. While it can help make everyday necessities more affordable, it may not have a significant effect on your bottom line.