Social Security benefits make up a significant portion of income for millions of retirees. In fact, nearly one in four workers say that Social Security will be their primary income source in retirement, according to a 2022 survey from the Transamerica Center for Retirement Studies.
There's one key change coming to Social Security in 2023, however, and it could impact your benefits by hundreds of dollars per month. Here's why all retirees on Social Security should mark their calendars for Oct. 13.
How inflation will affect your benefits
Almost every year, Social Security beneficiaries will receive a cost-of-living adjustment (COLA). This adjustment aims to help benefits maintain their buying power. So when inflation goes up, Social Security benefits should increase as well.
Last year, beneficiaries received a whopping 5.9% COLA to account for rising inflation in the latter half of 2021. This year, though, the raise could be record-breaking.
Earlier in 2022, inflation reached a 40-year high. According to the most recent data from the Bureau of Labor Statistics, inflation is up 8.3% over the past 12 months.
A higher inflation rate also means there will be a larger COLA. Non-partisan group the Senior Citizens League estimates that next year's adjustment will be around 8.7%, which will be the largest COLA since 1981.
Why Oct. 13 is a key date for retirees
This 8.7% estimate isn't set in stone, and it will depend on how inflation fares in September. We won't know the official COLA until the Social Security Administration's official announcement, which is expected to happen on Oct. 13.
Regardless of where the actual COLA falls, it will be a historic moment for retirees. The average benefit amount is around $1,670 per month. An 8.7% increase would amount to an extra $145 per month for the average retiree.
If you're currently receiving Social Security, you won't need to do anything to receive this bonus. Once the Social Security Administration makes its announcement, the increase in benefits will take effect in January 2023.
The downside of a massive COLA
While a higher-than-average COLA means a larger boost in benefits each month, it also means you may need to pay more in taxes on your payments. Social Security is considered income, and any increase in income could result in a larger tax bill.
Also, this raise won't necessarily increase your buying power, as a higher COLA is only designed to help keep up with inflation. While this extra money can go a long way toward affording everyday essentials, it won't necessarily increase your discretionary income.
Next year's COLA will still provide much-needed relief to millions of seniors. But there are further implications than simply an increase in benefits. By tuning into the Social Security's announcement in October, it will be easier to plan for next year's changes.