When the Social Security Administration announced an 8.7% cost-of-living adjustment (COLA) for 2023 back in mid-October, many seniors were finally able to breathe a sigh of relief. For months on end, seniors (as well as younger consumers) have been buckling under the weight of inflation. And when we look at how well 2022's COLA has stood up, it's easy to see why retirees have been struggling.
In early 2022, seniors on Social Security saw their benefits increase by 5.9%. At the time, that seemed like a generous raise. But the rate of inflation this year has well outpaced that 5.9% lift, putting Social Security recipients at a major disadvantage.
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In a recent Motley Fool survey, 85% of retired Americans say they've definitely felt the impact of inflation, and that higher living costs have been a strain. Only 3% of retirees say they haven't really noticed a major uptick in living costs.
Given the number of seniors who are struggling financially thanks to inflation, the hope is that next year's COLA will help them regain a nice amount of buying power. But that will really only happen if inflation trends in one direction -- downward.
Persistent inflation could render next year's COLA useless
In October, the Consumer Price Index registered a lower annual rise in inflation than September's reading. So that's already being taken as a positive sign.
But that doesn't guarantee that inflation will cool off in 2023. For all we know, living costs could rise even more in the new year, putting seniors who get the bulk of their income from Social Security in a very difficult position.
Now the good news is that the Federal Reserve is clearly committed to slowing the pace of inflation. It's been aggressively hiking up interest rates for months in an effort to discourage heavy consumer spending -- and narrow the gap between supply and demand that's been causing inflation to surge.
But it's hard to know how successful the Fed will be. Many Americans are still sitting on leftover cash due to generous stimulus policies lawmakers enacted during the pandemic. And so it's hard to predict whether higher borrowing rates will cause a notable pullback in spending or not. And as such, it's also difficult to say whether Social Security's 2023 COLA will end up being the financial lifeline seniors want it to be.
All of this really underscores the importance of having income outside of Social Security during retirement. Seniors who have savings to tap or investments to cash out are no doubt in a stronger financial position these days than those who are mostly reliant on Social Security to stay afloat.
Of course, it's a little late for current retirees to go back in time and build savings. But those who are still working should consider the financial stress seniors have been under this year -- and use that as motivation to boost their IRA or 401(k) plan contributions to avoid a similar fate once it's their turn to retire.
