This past October, seniors on Social Security learned that their benefits would be rising by 8.7% in 2023. That's one of the highest cost-of-living adjustments (COLAs) on record.
Of course, the reason Social Security is getting such a huge raise this year is that inflation levels warranted it. For pretty much all of 2022, consumers were forced to grapple with soaring living costs. And many seniors on Social Security struggled because of that -- namely because the 5.9% COLA they got at the start of 2022 just didn't hold up.
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But this year, seniors stand to actually gain buying power from their 8.7% COLA. And a recent inflation report drives that concept home even further.
Inflation slowed in December
In December, the Consumer Price Index, which measures changes in the cost of consumer goods, rose 6.5% on an annual basis. Now, historically speaking, that's a high number. But it's a lower number than we've seen in many months.
Meanwhile, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is a subset of the CPI, rose 6.3% in December on an annual basis. The CPI-W is the measure that's used to calculate Social Security COLAs. Specifically, third-quarter CPI-W data is aggregated each year to determine an upcoming COLA, which is why these announcements are commonly made in October -- it's when September inflation data becomes available.
Great news for Social Security recipients
The reason Social Security COLAs often fail seniors is that they don't manage to keep pace with inflation. But so far, the opposite seems to be happening this year.
Seniors' 8.7% raise is surpassing the most recent reported rate of inflation. And if the trend of inflation levels dropping from one month to the next persists, Social Security beneficiaries might actually have an excellent year ahead of them.
In fact, seniors on Social Security who are finally gaining buyer power should take advantage and jump at the opportunity to pump some money into savings. Much of the time, Social Security COLAs end up disappointing seniors. This year, between tapering inflation levels and shrinking Medicare costs, seniors on Social Security finally have a chance to come out ahead -- and it's one they really shouldn't squander.
Now, this isn't to say that seniors who are finally ending up with leftover money at the end of the month should rush to load up on stocks or throw their cash into different investments. Simply sticking that extra money in the bank is a perfectly reasonable move.
Thanks to recent rate hikes on the part of the Federal Reserve, banks are finally paying more generously for risk-free products like savings accounts and CDs (these accounts are risk free in the sense that a loss of principal is not a concern at FDIC-insured institutions). It makes sense for seniors who get the bulk of their income from Social Security to simply throw their leftover money into one of these products, enjoy 3% or 4% interest, and save up, so they have a cushion for future years, when Social Security raises might continue the pattern of falling short.
