Social Security recipients might soon receive one of the largest benefits increases in the program’s history. A new estimate put out by the Senior Citizens League projects that, due to high inflation, Social Security’s annual Cost of Living Adjustment (or “COLA”) might boost payments by anywhere from 9.3% to 10.1%.
This would be the third highest cost of living adjustment ever, only following those issued in 1980 and 1981.
For more help navigating how Social Security COLA increases will affect your retirement, consider working with a financial advisor.
What Is COLA?
The Cost of Living Adjustment is how Social Security keeps payments up-to-date with rising prices and inflation. Each year, the Social Security Administration makes this calculation based on the previous year’s inflation and announces its decision in December. So, in December, 2022 the agency will announce its definitive cost of living increase for all payments to be issued in 2023.
The formula for COLA was set in the 1975 law which established the practice. Before that, Congress adjusted Social Security by legislation on a periodic basis. Specifically, COLA uses a metric known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.
Although the exact calculation is more detailed, broadly speaking Social Security measures each year’s cost of living increase based on how much the CPI-W changed from one autumn to the next. So, in the case of 2023, it will make its decision based on how much inflation changed from fall 2021 to fall 2022.
This isn’t always a perfect system, but it helps retirees keep up as prices inevitably rise each year.
COLA During Surging Inflation
Cost of living adjustments are common because the U.S. economy experiences some form of inflation almost every year. In fact, the SSA has issued one in all but three years since Congress passed this law. What is uncommon is such a dramatic increase.
That’s an artifact of high inflation.
In the wake of Covid, virtually all major economies around the world have experienced historic price increases. The U.S. has been no exception, with annual inflation rates in 2022 ranging from 7.4% to a mid-year high of 9.06%. While have recently slowed down, with negative month-to-month inflation between June and July, this year will still almost certainly record the highest annual rate of inflation since 1981.
The cost of living adjustment will automatically account for this.
According to estimates by the Senior Citizens League, at the current rate of change inflation will drive a 9.6% COLA. This would increase the average take-home benefit for retirees by $159 per month. For someone who collects the maximum possible benefit of $4,194 per month it will mean an extra $402.62 in each check.
The exact adjustment will depend on the remaining two months of relevant inflation data. Since the Social Security Agency measures its cost of living adjustment based on inflation from the third quarter of the previous year to the third quarter of the current year, it only pulls inflation rates through September. Based on likely projections for inflation in the coming two months, this means that the 2023 COLA will most likely be somewhere between 9.3% and 10.1%.
For senior citizens pinched by high prices throughout 2022, this is likely to offer significant relief, especially if July’s early signs prove true and inflation begins to abate.
Social Security payments may rise by up to 10.1% in 2023 thanks to the inflation-based Cost of Living Adjustment.
Tips for Collecting Social Security
- Collecting the maximum Social Security benefit isn’t easy, but you can definitely do it. You’ll need planning, and a bit of income maximization, but it can be really worthwhile in the long run.
- How much will you need Social Security? While the payments are nice, they’re probably not enough to keep you comfortable throughout retirement. With SmartAsset’s matching tool you can find a financial professional near you to help make sure you use Social Security as just one part of a robust retirement plan. Match with a trust financial advisor now.
Photo credit: ©iStock.com/JJ Gouin,©iStock.com/DNY59