Social Security Benefits Could Rise 9.6% in 2023, But Retirees Still Have a Big Problem | Smart Change: Personal Finance
Inflation has exceeded the 2% target set by the Federal Reserve for 17 consecutive months, and has already reached a 40-year high of 9.1% in June 2022. A number of factors have contributed to this problem – loose monetary policy, checking stimulus. , supply chain turmoil, geopolitical conflict — and many Americans are feeling the pressure.
As a result, the Seniors Association estimates that older adults could see a cost of living adjustment (COLA) of 9.6% in 2023. This would be the largest cost-of-living adjustment since 1981, but there is still a significant problem.
The Senior Citizens Association also estimates that Social Security benefits have lost 40% of their purchasing power since 2000, and a quarter of that decline has occurred since March 2021. To be clear, the loss of purchasing power has occurred even though all COLAs have been implemented since 2000, which means that Social Security benefits failed to keep pace with inflation.
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Here’s what you should know.
Why the cost of living adjustments fall short
COLA is calculated based on changes in the Consumer Price Index for urban wage earners and clerical workers (CPI-W), which the Department of Labor publishes on a monthly basis. Specifically, the average CPI-W for the third quarter of the current year is compared with the average CPI-W for the third quarter of the previous year. If there is a discrepancy, the COLA (equal to the percentage increase in CPI-W) is applied to Social Security benefits paid in the following year.
So what’s the problem? CPI-W measures the average change in the prices paid by office workers and other wage workers for a basket of goods and services. But the CPI-W population represents only 29% of the total US population, and spending patterns for clerical and salaried workers do not necessarily reflect the spending patterns of retirees. For example, Medicare Part B premiums rose 14.5% in 2022, outstripping the 9.1% increase in CPI-W during the first seven months of the year. Seniors are also more likely to spend time at home, and the Association for Seniors reports that the price of home heating oil rose 79% between March 2021 and March 2022.
With that in mind, a 9.6% asset interest rate increase in 2023 might seem like a significant increase. After all, the average retiree will get an extra $159 per month. But the truth is, higher prices are likely to erode that extra money, and older people may actually feel like they have less money.
Of course, 9.6% of COLA is still a preliminary estimate. The actual increase cannot be calculated until CPI-W data is available from August and September. Retirees should expect the Social Security Administration (SSA) to announce the final COLA formula in mid-October. In the meantime, seniors who rely heavily on Social Security retirement benefits should take a look at their monthly budgets and make cuts where possible.
Future retirees still have time to prepare
According to a Gallup poll, Social Security is currently a “main source” of income for 55% of retirees, but the same survey shows that only 33% of non-retirees expect Social Security to be a major source of income. In other words, many Americans may end up relying on Social Security to a greater degree than they expected.
To hedge this risk, future retirees must understand how much money they need to retire, and they should use the calculators provided by the SSA to estimate their monthly Social Security benefits. There will almost certainly be a gap between these two numbers, and if other retirement plans do not compensate for that gap, future retirees may need to reframe their budgets or consider delaying retirement.
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