Although Social Security has been around for a really long time, the program tends to evolve from year to year. One change seniors have come to expect is their annual cost-of-living adjustment, or COLA.
The purpose of COLAs is to give seniors on Social Security the opportunity to maintain their buying power as living costs creep upward. Over time, the value of a dollar tends to erode, due to inflation. If benefits were to stay the same indefinitely, seniors who get the bulk of their retirement income from Social Security would no doubt struggle immensely, so COLAs are designed to prevent that. (Whether they actually do the trick is a different story.)
Meanwhile, in 2023, Social Security will be giving seniors a major boost to their benefits. In fact, next-year's COLA is the highest that Social Security recipients will have received in decades.
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Seniors are getting a COLA above 8%
Prior to 1975, Social Security benefit increases were determined by legislation. But starting in 1975, the rules changed, and since then, Social Security benefits have been eligible for an automatic COLA that's pegged to the rate of inflation.
Because inflation has been rampant this year, the Social Security Administration just announced that seniors will be privy to an 8.7% COLA that takes effect in 2023. And that's huge, because prior to this recent COLA, Social Security has only dished out a COLA above 8% three times before:
- In 1979, it announced a 9.9% COLA
- In 1980, it announced a 14.3% COLA
- In 1981, it announced an 11.2% COLA
All told, even though this recently announced 8.7% COLA isn't the largest Social Security has ever given, it's still pretty significant. While some seniors may be disappointed with that number (namely because some experts had initially been calling for an 11% COLA for 2023), it could end up being a very helpful boost.
How far will an 8.7% COLA go?
That's really the big question. For many years, seniors on Social Security have been losing buying power due to the inability of COLAs to keep up with inflation -- even though they're supposed to be tied directly to it.
This-year's COLA is a prime example of that failing. At the start of 2022, seniors on Social Security saw their benefits increase by 5.9%. And at the time, that read like a pretty significant raise.
But over the past 10 months, the rate of inflation has far exceeded 5.9%. As a result, seniors on Social Security once again lost buying power, even when their COLA was relatively generous.
As such, whether this newly announced 8.7% COLA actually holds up will hinge on inflation levels in the coming months. If inflation finally starts to cool, seniors might gain a modest amount of buying power -- something they desperately need. But if inflation continues to soar, seniors may not come out ahead financially in 2023 -- even with one of the most substantial COLAs Social Security has ever seen.
