Social Security is a significant source of income for tens of millions of U.S. seniors. As inflation increases, retirees have a more challenging time keeping up with their expenses.
As a result of rising inflation in late 2021, Social Security beneficiaries received a 5.9% cost-of-living adjustment, or COLA. The COLA for 2023 will probably be even higher because costs have increased throughout the year. Higher COLAs may not be as beneficial as they seem.
What will your benefit be?
In terms of the size of the COLA for 2023, it is unclear at this point. Throughout the rest of 2022, inflation will determine the final number. Researchers from the Senior Citizens League (SCL) estimated earlier this year that next year’s COLA might be as high as 8.6%. Recent research from the nonpartisan Committee for a Responsible Federal Budget suggests it could be as high as 10.8%, the highest since 1981. The SCL estimates that if inflation runs higher than the recent average, the COLA could be 11.4%, according to the SCL; conversely, if inflation runs lower than the current average, the COLA could be 9.8%. Inflation is expected to moderate later in 2022, resulting in a 7.3% to 10.8% Social Security COLA increase in 2023.
Most retirees would receive hundreds of dollars in additional monthly benefits if their benefits were increased by almost 11%. However, a higher COLA isn’t necessarily a good thing, even if it would make it easier for them to afford ever-increasing goods and services costs.
High COLAs have some downsides.
The cost-of-living adjustment in Social Security is designed to keep retirees current with inflation. Seniors have historically been unable to keep up with real cost increases with those annual adjustments. In 2022, retirees received a 5.9% increase in benefits. Since last year, has increased by 8.6%, according to the Bureau of Labor Statistics.
According to the Senior Citizens League, Social Security benefits have lost roughly 40% of their buying power since 2000, even with annual COLAs. Despite next year’s hefty Social Security boost, those bigger checks may not go as far as they once did.
Medicare Part B premiums also increase faster than inflation and Social Security COLAs. Part B premiums rose 14.5% in 2022, one of the most significant increases in program history.
When COLAs increase in income, low-income people often lose income-related benefits and pay higher taxes if they make more than $25,000 for individuals and $32,000 for couples. Until tax time (starting in April 2023), you won’t feel the impact of this change.
The increase in income could result in a loss of income-adjusted Medicare health and prescription drug benefits for low-income beneficiaries, and higher-income beneficiaries may have to pay more for Medicare Part B and Part D.
The best way to prepare.
Having a healthy nest egg before retirement is more critical than ever because Social Security benefits are steadily and incrementally losing purchasing power. Don’t wait until you retire to increase your savings and investment portfolio. Investing a little more each month can make a big difference over the long term, reducing your dependency on Social Security.
Increasing your savings may be more challenging if you’re already retired. Nevertheless, if you want to make your money last longer, you may want to consider cutting some expenses. Whatever happens with inflation or the 2023 COLA, you’ll be better off if you can count on your own nest egg