Social Security benefits are a key source of income for millions of older adults. In fact, around 37% of men and 42% of women rely on their monthly checks for more than half of their retirement income, according to data from the Social Security Administration.
If you're depending on Social Security in retirement, any changes to the program can have a significant impact on your finances. And there's one upcoming announcement that will affect how much you receive in benefits in 2023.
How inflation affects Social Security
Social Security is a fixed-income source that's adjusted for inflation each year to help maintain its purchasing power. This boost in benefits is called a cost-of-living adjustment (COLA).
Most years, the COLA is relatively small -- generally just a 1% to 3% increase in benefits per year. However, because inflation has been surging throughout 2022, next-year's COLA will be significantly larger than average.
The Social Security Administration is responsible for calculating this figure. It does so by looking at the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) -- which reflects the price changes for consumer goods and services -- from July through September. Then it compares that number to the same data from the year prior.
For example, in the third quarter of 2020, the CPI-W was 253.412. In the third quarter of 2021, it was 268.421. That's a 5.9% increase, which is why seniors received a 5.9% COLA in 2022.
The Social Security Administration is expected to release next-year's official COLA on Oct. 13. Mark your calendars, because the adjustment for 2023 will likely be one of the largest in decades.
How high will the COLA be for 2023?
While nobody will know the exact COLA until the Social Security Administration makes its announcement, some experts have made predictions based on how inflation has fared throughout the year. Nonprofit group The Senior Citizens League, for example, predicts that next-year's COLA will be around 8.7%. Not only is that significantly higher than the usual 1% to 3% increase, but it soars past this-year's whopping 5.9% raise, too.
An 8.7% COLA would also be the largest adjustment since 1981. The average retiree collects around $1,673 per month from Social Security, and an 8.7% increase would result in an extra $146 per month.
Where the official COLA will land depends on September's inflation data, which will be released by the U.S. Bureau of Labor Statistics in the coming days. If the CPI-W ends up being higher than expected in September, next-year's COLA could potentially be even larger than the 8.7% estimate.
How the COLA will affect you
Regardless of where next-year's COLA falls, there's nothing you need to do to receive it. If you're already receiving Social Security benefits or Supplemental Security Income (SSI), your payments will automatically increase starting in January 2023.
Next-year's COLA will also affect aspects of Social Security outside of monthly retirement benefits. It will increase the maximum benefit amount, for example, as well as increase the earnings limits for those continuing to work while on Social Security. A higher earnings limit means you can earn more without having your benefits reduced.
Social Security benefits can go a long way in retirement, so it pays to stay up to date with the latest changes to the program. Retirees can expect a much larger-than-average boost in benefits in 2023. By tuning into the announcement on Oct. 13, you'll know exactly how much to expect.