Retirees are going to experience something in 2023 that has never happened for 40 years and is unlikely to happen again: an unprecedented Social Security benefits increase.
Here's why this increase is so large, and some details on why seniors are unlikely to see such a big raise again during their lifetime.
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The biggest boost since 1981
In 2023, Social Security recipients wll get an 8.7% cost-of-living adjustment (COLA) -- the largest since 1981.
When beneficiaries got a 5.9% bump in 2022 and a 5.8% increase in 2009, those were the only two years since 1992 that raises topped 5%. You would have to go back to 1981 to see a benefits increase above 8.7%, when retirees received an 11.2% COLA.
Don't expect another hike this huge
"This may be the first and possibly the last time that beneficiaries today receive a COLA this high," according to the Senior Citizens League, an advocacy group.
The Senior Citizens League pointed out that in the entire history of automatic COLAs, which date back to 1975, there have only been three years when the benefit increase was bigger. And the conditions contributing to such a big raise are unlikely to be repeated.
The benefits hike in 2023 is due to a unique combination of factors that caused prices to surge. COVID-19 led to supply chain disruptions, while demand surged because people had extra money due to COVID stimulus checks and because they had a forced reduction in spending during monthslong lockdowns.
Inflation ended up hitting a 40-year high in large part due to these issues, which are unlikely to reoccur. And the COLA is directly based on the level of inflation during the third quarter of the prior year. Since the COLA was calculated when inflation was peaking, seniors ended up with a huge raise.
The Federal Reserve has been taking steps to stop this rapid increase in prices, and rising interest rates combined with a lack of stimulus funds this year might be causing inflation to start to cool. If this trend continues, next year's raise could be much smaller. And unless inflation hits another multidecade high in the coming years, all future raises could look paltry in comparison to the benefits bump in 2023.
And while a big raise might seem like a good thing, it's only happening because prices have gone up a lot. So while seniors will get a substantial increase, it's unlikely to give them a ton of extra spending power. That means responsible spending will still be the way to go to make retirement savings last.
