The wait is over. After months of speculation, Social Security recipients now know how much additional money they'll receive in 2023. And it will be the biggest "raise" in over four decades.

Last week, the Social Security Administration (SSA) announced a cost-of-living adjustment (COLA) of 8.7%. Everyone who receives Social Security benefits will see much larger checks beginning in early 2023. But there could be a gotcha with your huge Social Security increase.

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A COLA that could lose its fizz

Social Security COLAs are intended to prevent benefits from being eroded by inflation. Since 1975, the SSA has provided the adjustments on an annual basis with that overriding goal in mind.

That goal clearly wasn't met this year, though. Retirees received a benefit increase of 5.9% beginning in January 2022. But the average inflation rate as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is 8.9% higher as of September than it was at the same point last year. 

Why is the COLA for 2023 less than the year-to-date inflation increase? The SSA only uses CPI-W data from the third quarter of the current and previous years to calculate the adjustment. Inflation subsided somewhat in Q3 of this year compared to earlier in 2022.

If inflation declines further throughout the rest of this year and next year, retirees could truly feel a positive impact from their Social Security increase. However, if that doesn't happen, the upcoming COLA could lose much of its fizz.

Three worrisome signs

The horse is out of the barn when it comes to helping seniors cover the higher costs they've already incurred so far this year. Unfortunately, there are three worrisome signs that the 2023 COLA won't provide as much protection against inflation as desired going forward, either.

First, inflation (again, using the CPI-W as the measure) appears to be rebounding after declining for two consecutive months. The more widely followed Consumer Price Index for All Urban Consumers (CPI-U) jumped 0.4% from August to September.

Second, fuel prices are rising again. During the summer, prices fell significantly. However, OPEC+ recently announced major oil production cuts. This could spark another surge in inflation. 

Third, a recent survey conducted by the Employee Benefit Research Institute (EBRI) found that 27% of retirees are spending more than they can afford. That's up from 17% in 2020. This issue is especially problematic among African-American and Hispanic retirees, lower-income households, and individuals with poor health. 

Looking on the bright side

It's quite possible that your huge Social Security increase will have a gotcha due to persistently high inflation. Still, some experts believe that inflation will slow down in 2023.

For example, Morningstar projects that inflation will return to normal levels next year. This optimistic outlook is based in part on the Federal Reserve's aggressive interest rate hikes to control inflation. Morningstar also expects that supply chain issues that have fueled inflation will resolve over the near term. 

Retirees won't spend as much on Medicare Part B premiums next year, either. The Centers for Medicare and Medicaid Services (CMS) recently announced that the standard Medicare Part B premium will be $5.20 lower in 2023 than it was in 2022. In addition, the annual deductible for beneficiaries will decline to $226 from $233 this year. These won't be enormous savings for retirees, but every extra dollar helps.