Next year could be historic for retirees, as seniors will receive one of the largest Social Security increases on record.
For the average retiree, it will result in hundreds of dollars more per month in benefits. With inflation surging and the costs of necessities continuing to rise, that extra cash could go a long way. Here's how much seniors can expect to receive.
Why are benefits dramatically increasing in 2023?
In most years, Social Security beneficiaries receive cost-of-living adjustments (COLAs). These annual boosts are structured to help their monthly checks keep pace with inflation.
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Some inflation is normal in a healthy economy. When it's within the range that the Federal Reserve views as ideal, those COLAs will usually land in the 1% to 3% range. But inflation started to surge in 2021, so in January of this year, seniors received a whopping 5.9% boost. And because prices have continued to skyrocket throughout 2022, the COLA for 2023 will almost certainly be even bigger.
COLAs are based specifically on the inflation rates during the third quarter of the year -- July, August, and September -- and the government has not yet released its data for the month that just ended. So we won't know the official number until mid-October, when the Social Security Administration makes its announcement. But analysts at the nonprofit Senior Citizens League are predicting that the COLA for 2023 could be around 8.7% -- which would be the largest increase since 1981.
How will this affect benefits?
A higher COLA means retirees will start receiving larger checks in January 2023. Exactly how much more a person will receive depends on what their current benefit is.
The average retiree collects around $1,673 per month in benefits, according to the most recent data from the Social Security Administration. If next year's COLA does land at 8.7%, the average retiree will receive an extra $146 per month.
If you're currently receiving other types of Social Security, such as spousal benefits or Supplemental Security Income (SSI), you'll also see a boost thanks to the 2023 COLA.
The not-so-good news about next year's COLA
Seniors -- especially those living on fixed incomes -- have been hit hard by inflation this year. The good news is that a larger-than-average COLA will make it easier for them to afford everyday essentials. The bad news is that it still may not be enough.
Though the annual adjustments are intended to compensate for inflation, Social Security benefits have been consistently losing buying power. This is partly due to how COLAs are calculated. The COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) -- a metric that looks at how inflation impacts a basket of things that working adults spend their money on. And the sources of seniors' expenses can differ dramatically from those of workers.
As a result, the categories where retirees tend to spend the most -- such as housing and medical care -- tend to be underrepresented in the metric used to calculate the COLA. So although retirees will receive a substantial benefit boost next year, it may not be enough to cover the higher costs they are actually facing.
The individual years' differences may be small, but they add up. Since 2000, Social Security has lost around 40% of its buying power, according to a 2022 report from the Senior Citizens League. Social Security benefits just don't go as far as they used to.
What can you do to prepare?
There may not be much you can do to reduce the impact of inflation. But you can head into 2023 with realistic expectations about how far this COLA will go.
To be clear, this adjustment will still provide much-needed relief to cash-strapped seniors. But it's not necessarily the raise many retirees may wish for. By understanding the limits of this benefit increase, you can head into 2023 more prepared.
