For much of 2022, seniors on Social Security found themselves wondering what their 2023 cost-of-living adjustment (COLA) would amount to. And in October, they got their answer.
Based on third quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), it was determined that Social Security benefit would be rising 8.7% in 2023. The purpose of COLAs is to help Social Security recipients maintain buying power as the cost of living rises, so those COLAs are tied directly to inflation.
Last year, Social Security benefits rose 5.9% at the start of the year. But the rate of inflation far surpassed that raise, leaving seniors in a tough financial spot.
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This year, however, Social Security recipients could get a lot more out of their COLA. Here's why.
Inflation is finally slowing down
In December, the CPI-W rose 6.3% on an annual basis. Now to be clear, that's a significant jump. But when we compare 6.3% to the 8.7% COLA seniors are getting, we can see clearly that 2023's raise is outpacing inflation so far. And that's a very good thing.
What's just as important is the fact that the pace of inflation has cooled steadily since Social Security's 2023 COLA was announced back in October. And part of the reason for that could stem from the Federal Reserve's interest rate policies.
The Fed pushed a series of aggressive interest rate hikes through in 2022 in an effort to cause a modest pullback in consumer spending. The whole reason inflation has been so rampant is that demand for consumer goods and services has exceeded supply.
The Fed is hoping to achieve a soft landing with its interest rate policies -- meaning, it wants consumer spending to decline enough to cool inflation, but not so much to spur a recession. Whether its strategy works is yet to be determined.
But either way, it's fair to say that the pace of inflation has slowed down. And if inflation levels continue to fall, seniors on Social Security could actually gain quite a bit of opportunity in 2023.
An opportunity to take advantage of
Many seniors kick off retirement with little to no money in savings and become heavily reliant on Social Security to make ends meet. Those in that boat should do what they can to shore up their finances in 2023 -- especially if inflation levels continue to recede.
Most years, Social Security COLAs fall short in helping seniors keep pace with inflation. Taking advantage of the opposite scenario is something all Social Security recipients should do -- whether they've been struggling financially of late or not.
Let's also remember that this is the first year in a long time that Medicare costs are decreasing instead of rising. Seniors who are enrolled in Medicare and Social Security at the same time have their Part B costs deducted from their benefits, and Part B premium hikes can eat into COLAs. That's not happening this year, which puts Social Security recipients in a pretty strong position at long last.
