In 2023, retirees will most likely receive a much larger Social Security check than they are entitled to in 2022. In fact, their benefit increase will be the largest in four decades.
While that sounds like a good thing, the sad reality is that it’s really bad news that seniors are getting so much extra cash. Here’s why.
Seniors could see an 8% increase next year
The elderly on Social Security receive periodic cost-of-living adjustments (COLA) when a consumer price index called CPI-W shows that the price of goods and services is rising. Third-quarter data is used to determine the benefit hike, and that’s not yet available — so the Social Security increase won’t be officially announced until October.
Still, based on current price trends, it’s clear that retirees can expect to see a lot more money on their checks next year. In fact, Stephen Goss, the Social Security Administration’s chief actuary, recently commented on the issue during a June 2 webinar with the Bipartisan Policy Center on Social Security. “Looking at the CPI-W trends we’re seeing so far this year, it’s likely we’ll have a COLA closer to 8%,” Goss said.
A 8% increase in benefits would be the largest annual increase for seniors since 1981, when there was a 7.4% COLA. That’s much higher than this year’s 5.9% increase, and could add more than $100 to a retiree’s average monthly payment.
How can a big increase in Social Security benefits be a bad thing?
Getting a huge Social Security raise sounds good since everyone likes to earn more money. There is only one problem. The COLA is not a raise in the traditional sense, like when your boss gives you a higher salary because you’ve moved up in the company or taken on new tasks. Instead, COLAs are simply designed to help ensure retirees don’t lose purchasing power.
When the cost of goods and services rises, each Social Security check would buy less if older people did not receive periodic increases in benefits. Unfortunately, the formula used to determine the magnitude of each increase is based on a measure of inflation that tracks the price of the basket of goods and services traditionally purchased by urban wage earners and office workers. Therefore, it often underestimates the actual inflation experienced by retirees, since older people have different spending habits.
Even if the COLA formula were an accurate measure of seniors’ spending, seniors would still not be better off as a result of their increases, because the amount of their benefit increase is based solely on the lower prices of items they ‘they buy. at the top. Simply put, if the price index shows that your annual costs for the products you buy will be 8% higher and you get 8% more money, all you’ve done is avoid losing ground.
So that seniors do not end up with more purchasing power despite a large COLA, and they could end up with less money than they actually need to keep up with inflation since the formula used to determine their increase is not the best one. And if that weren’t enough, it’s also important to remember that retirees don’t just depend on Social Security — they also need savings, because their benefits aren’t enough to live on.
Inflation is not good for savers, especially those with more conservative portfolios, as seniors tend to have. When prices go up 8%, but seniors don’t get an 8% return on their invested funds, their retirement accounts won’t go as far.
Unfortunately, this will mean that retirees may have to adjust their spending habits and look for ways to cut costs as inflation rises, despite a huge increase in Social Security.
The $18,984 Social Security premium that most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help boost your retirement income. For example: a simple trick could earn you up to $18,984 more…every year! Once you learn how to maximize your Social Security benefits, we believe you can retire confidently with the peace of mind we all seek. Just click here to find out how to learn more about these strategies.
The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.