It's fair to say that many seniors on Social Security struggled to cover their bills in 2022 due to inflation. The same applied to consumers across the board.
But the good thing to come out of rampant inflation was an 8.7% cost-of-living adjustment (COLA) for Social Security recipients in 2023. That's the largest raise beneficiaries have gotten in decades, and it's well beyond the 5.9% raise that came through in 2022.
Meanwhile, that 8.7% COLA is already helping seniors on Social Security gain buying power. The reason? The rate of inflation has dropped substantially since that COLA got approved in October 2022. And if that trend continues, seniors on Social Security might finally land in a position where they can use some of their benefits to shore up their finances.
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But while cooling inflation might seem like a good thing for seniors (and consumers in general), it could have one major downside. And it's something Social Security recipients may not be happy about come 2024.
Will lower levels of inflation lead to a stingy Social Security raise?
Prior to 2022, recent Social Security COLAs hadn't been much to write home about. But because inflation started to soar in 2021 and then really ramp up in 2022, Social Security benefits were adjusted accordingly.
In fact, Social Security COLAs are based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). In December 2022, the CPI-W rose 6.3% on an annual basis. That's a notable jump, historically speaking. But it's clearly not nearly as high a jump as 8.7%.
Meanwhile, there's reason to believe that inflation will continue to cool. Consumer spending is likely to decline this year as borrowers balk at higher interest rates and leftover stimulus funds run out. If that trend persists, this year's 8.7% Social Security COLA might go really far. But that could also lead to a more disappointing COLA in 2024.
Make the most of that extra money
It's too soon to even begin to predict what next year's Social Security COLA will look like. But it's also fair to assume that barring a really unexpected reversal of course, 2024's COLA will be a lot lower than the 8.7% Social Security raise seniors got in 2023.
That's not necessarily a bad thing, because it will mean relief from soaring inflation. But seniors who are seeing all of that extra money in their monthly benefits now should take advantage of it to the greatest extent possible. That means sticking some of that money into savings or investing it in case next year's COLA doesn't offer those same opportunities, which it very well may not.
Most years, seniors on Social Security lose money due to COLAs that can't keep pace with inflation. It's looking like 2023 will be a much-welcome exception. But we shouldn't expect a repeat situation in 2024, and that's something Social Security recipients should recognize sooner rather than later so they don't blow the opportunity to better themselves financially.
