Earlier this year, seniors on Social Security no doubt spent a lot of energy contemplating one big question: How much of a raise would they end up getting in 2023?
In mid-October, they got their answer. Based on third quarter inflation data, Social Security benefits will be eligible for an 8.7% cost-of-living adjustment, or COLA, in 2023. That's the largest raise to reach Social Security in decades.
But will an 8.7% raise actually help Social Security recipients gain buying power? That's questionable. And in a recent Motley Fool survey of retired Americans, 55% of respondents said that next year's COLA really won't cut it, despite it being rather large. Only 39% of respondents think next year's COLA is spot-on based on a recent rise in living costs.
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Why an 8.7% COLA may not result in more buying power
Social Security COLAs are tied directly to inflation. For seniors to be eligible for an 8.7% COLA, the rate of inflation has to be comparable. So in reality, seniors may not come out ahead financially in the new year because what they gain in terms of a higher monthly benefit, they might lose in the form of higher ongoing expenses.
That said, seniors could benefit financially from their 8.7% Social Security COLA if inflation levels start to sink. And so far, there's reason to think that could happen.
In September, the Consumer Price Index (CPI), which measures changes in the cost of consumer goods, rose only 7.7% on an annual basis. For context, the Consumer Price Index for Urban Wage Earners and Clerical Workers is a subset of the CPI, and that's the specific measure used to calculate annual COLAs.
Now if the word "only" seems ridiculous in this context, that's understandable. But it's important to note that a 7.7% annual rise is the lowest one the CPI has registered in many months. And it's a sign that inflation may be on the way down.
Now, let's say that CPI readings continue to shrink in 2023. Seniors may, in that case, gain some buying power by virtue of having locked in a higher COLA based on a larger degree of annual inflation. But even so, the lift in buying power they get may be minimal.
Don't retire on Social Security alone
In the aforementioned survey, 85% of respondents said that inflation has put a strain on their budgets. And that highlights the importance of having retirement income outside of Social Security.
Social Security's annual COLAs often fail to help seniors keep pace with inflation, even though that's what they're designed to do. And so the best way to ensure financial comfort and stability in retirement is to have income outside of those benefits, whether through a mix of savings, investments, and even part-time work.
Ultimately, it's too soon to know how well next year's 8.7% Social Security COLA will hold up. But clearly, a large chunk of Americans aren't confident that a raise that large will improve their financial lives. And that's certainly saying something.
