But is that actually a good thing?
Retiring on Social Security alone is a dangerous thing. That’s because those benefits will only replace about 40% of the typical worker’s pre-retirement income, and most seniors need about twice as much money to maintain a comfortable lifestyle.
But the reality is that a lot of people do end up retiring solely or largely on Social Security. And it’s those same people who are apt to be the most impacted by Social Security raises.
Each year, benefits are subject to a cost-of-living adjustment, or COLA, based on inflation levels. Since inflation has been sky-high this year, benefits will likely increase substantially going into 2023. But whether that’s actually a good thing is really up for debate.
A mixed bag
This year, Social Security recipients saw their benefits increase by 5.9%. The last time benefits rose more than 5.9% was back in the early 1980s. As such, next year’s raise could be the largest one seniors get in 40 years.
It’s too soon to say exactly what 2023’s COLA will look like. That’s because that raise will hinge on third-quarter data from the consumer price index for urban wage earners and clerical workers (CPI-W). Since it’s still September, a full set of third-quarter data isn’t available yet — and it won’t be until almost mid-October, which is when the Social Security Administration will announce next year’s COLA.
But based on the data so far, it’s fair to assume that next year’s COLA will well outpace the 5.9% seniors got this year. Estimates have ranged from roughly 8.5% to almost 11%, so even if the final number falls somewhere in the middle, you can bank on it being large.
But that’s not necessarily a good thing. After all, the only reason 2023’s COLA will be so high is that inflation is high. And because the CPI-W doesn’t necessarily account for the expenses that are the most applicable to seniors, there’s a good chance Social Security beneficiaries will end up losing buying power in 2023, even if their monthly payments end up increasing a lot.
Don’t rely too heavily on Social Security
Inflation has been crushing consumers of all age groups — but it’s dealt a particularly tough blow to retirees on a fixed income. For current seniors who get most or all of their income from Social Security, there may not be much to do about rampant inflation other than try to adjust spending habits and look into part-time work.
But for current workers looking to avoid a similar fate in retirement, the solution boils down to saving aggressively to have extra income available later in life. Socking away $300 a month in a retirement plan over a 30-year period could result in a nest egg worth about $408,000 if that money is invested at an average annual 8% return, which is a bit below the stock market’s average.
Seniors today who have savings to tap are probably faring much better than those who are limited to a Social Security paycheck. And that will likely continue to hold true regardless of what 2023’s COLA amounts to.