In late 2022, seniors on Social Security got some seemingly good news: Their benefits would rise by 8.7% at the start of 2023. That 8.7% cost-of-living adjustment (COLA) was the largest one to arrive in decades. And given that inflation cooled last year, it may have done a reasonably OK job of helping seniors maintain buying power.
But a Motley Fool survey conducted in late 2022, following the 2023 COLA announcement, found that more than 50% of respondents weren't happy with that raise -- because they felt it wasn't high enough.
Meanwhile, this year's Social Security COLA is only 3.2%. And that begs the question: If an 8.7% COLA wasn't adequate for so many seniors, how are they going to get by this year on a mere 3.2% boost?
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The problem with COLAs
The fact that more than half of retired Americans found an 8.7% COLA inadequate in late 2022 isn't so shocking. COLAs have long done a poor job of helping seniors maintain their buying power in retirement. A big reason for this boils down to how they're calculated.
Social Security COLAs are based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But as one might imagine, the costs incurred by urban wage earners aren't necessarily the same as the costs typically incurred by seniors and retirees.
As one example, it's common for Social Security beneficiaries to spend a lot of their money on healthcare expenses, like Medicare premiums, coinsurance, and deductibles. But urban wage earners who are younger may not have such high healthcare costs.
On the flip side, urban wage earners might spend a lot of money on gas and commuting costs. But gas and transportation may be a much smaller expense for Social Security recipients who don't have a daily commute.
All told, there's a bit of a mismatch when it comes to how Social Security COLAs are calculated. As a result, those raises often fail seniors, to some degree.
It's important to have savings
Since COLAs can't necessarily be counted on to help seniors maintain their buying power, it's important to save for retirement to avoid a financial crunch later in life. However, that's something today's Social Security beneficiaries can't exactly go back in time and do. Those with little-to-no savings today have few options for building a nest egg if they've already wrapped up their careers.
That said, if you're retired and worried you'll struggle financially, given this year's smaller Social Security COLA, take a close look at your spending and see if there are ways to cut corners. You may also be able to use the equity you have in your home to your advantage by selling your property, replacing it with a less expensive one, and using your profit as cash reserves to dip into when Social Security falls short.
In time, lawmakers may opt to change the way Social Security COLAs are calculated. But until then, the program's beneficiaries may continue to grumble about how ineffective they are -- even at times when they seem fairly generous.
