Retirees on Social Security are going to get a huge benefits increase in 2023. Their monthly checks will rise by 8.7%. This benefits increase is the biggest annual increase in retirement payments in the last four decades.
Seniors may be excited to see their payments go up so much. But there's some really bad news about this benefits bump that needs to be considered before you start counting your extra pennies.
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Here's the bad news about the 2023 Social Security benefits increase
While getting a raise is normally something to celebrate, Social Security benefit increases (cost-of-living adjustments, or COLAs) are a little different. They aren't raises in the traditional sense, in that they don't come from an employer as a reward for doing a good job. Instead, they are built into the retirement benefits program to help ensure that Social Security benefits don't buy less every year as prices rise over time.
If no COLAs were awarded, Social Security checks would stay the same even as the costs of goods and services naturally went up. Eventually, retirees would be able to purchase very little with their benefits and would be left struggling. To avoid this, Social Security benefits increase in most years by a set amount calculated using a specific formula.
To calculate each year's COLA, data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is compared on a year-over-year basis. If the data shows prices rose during the relevant quarter of the year, seniors get a COLA equal to the amount of the increase. So, the 8.7% benefits bump in 2023 is happening because the CPI-W showed prices were up an average 8.7% from one year to the next.
Seniors will get more money from Social Security, but since everything they buy will also be more expensive, it won't go further. It will buy the same amount -- or perhaps less, if inflation keeps increasing after the COLA calculation is complete.
There's more bad news to be aware of
Because COLAs are just put in place to allow seniors to keep buying the same basket of goods and services rather than to help them gain ground, seniors won't end up with extra retirement benefits due to the 8.7% raise. At best, they'll be able to maintain the same purchasing power they always had.
The bigger problem, though, is that seniors typically have other income besides Social Security checks to help them cover their costs. Usually, this money comes from investments or savings. And surging inflation of the kind that led to the 8.7% COLA is not good for savers or for conservative investors (which most retirees should be).
Seniors who have money in a savings account are going to get paid interest that's below the rate of inflation. And since retirees can't afford to take tons of risks with their investments, the return on investment their portfolios earn may also be well below the rate of inflation. So, their other income sources are losing ground thanks to the price increases that led to the big COLA.
If you're retired and you see that bigger check come in 2023, be sure to keep these factors in mind so you can be prepared for the reality of what your "extra" income will really buy.
