The pain of high inflation is often harshest on the fixed income budgets of current retirees. The only bright light of the relatively recent sky-high spike in inflation is the potential for a huge Social Security cost-of-living adjustment (COLA) in 2023. Estimates of the Social Security COLA in 2022 (for 2023) have been in the range of 8.6 to 10.5%. We have not seen a cost-of-living adjustment at this level since 2009.
The 2022 Social Security cost-of-living adjustment will not kick in until January 2023. So, retirees will likely continue to see their retirement incomes stretched thin over the next six months. The prices of everything you can't live without seems to be going up from, Mortgage rates or rent, food and even healthcare.
Update: Today the Social Security Administration announced that the Social Security Cost Of Living Adjustment for 2023 will be a whopping 8.7%.
Most retirees have never seen a Social Security COLA this high. If the Fed is able to bring inflation in line with targets, this will likely also be the last time current retirees see a Social Security COLA this big. There have only three other times since the start of Social Security automatic inflation adjustments that COLAs were higher (1979-1981).
June 2022 Consumer Price Index And Social Security
The consumer price index (CPI) for June was just released; it showed prices rising by 9.1% over the past twelve months, without seasonal adjustments. This is the largest year-over-year increase since the inflation year ending in November 1981. Based on this CPI data, the Senior Citizens League has estimated the Social Security Cost-Of-Living Adjustment for 2023 could be a whopping 10.5% Which is substantially higher than last year's 5.9% Social Security COLA.
With an average Social Security benefit of $1688 per month, a 10.5% Social Security COLA for 2023 would translate into about $175 more per month in the pockets of the average Social Security recipient. Retirees receiving above-average Social Security retirement come would see even bigger increases in their monthly Social Security checks. This would be the biggest Social Security increase in benefits since 1981. Picture it: we are in the midst of the Cold War, fighting with Russia. Reagan is president, and "Physical" by Olivia Newton-John hits #1 on the Billboard Charts.
Also keep in mind, a large Social Security COLA for 2023 could increase the taxes you pay on your Social Security benefits.
To be clear here, we are still just estimating where the Social Security COLA will be for 2023 based on current CPI data. If Fed is able to quickly bring down inflation numbers, we could see a smaller than expected Social Security COLA for 2023. Likewise, if inflation continues to run rampant, the COLA for Social Security could be even larger than predicted here. I don't know anyone who expected inflation to go away overnight. Optimistically it can start trending downwards, but I would be surprised if it didn't take quite some time to get it down to the Fed target of around 2% per year.
How Is The Social Security COLA Calculated?
To calculate the actual Social Security COLA for 2023, the Social Security Administration (SSA) uses the average inflation in the third quarter, based on the CPI-W to calculate how much increase Social Security benefits for the following year. For reference, the 2022 Social Security COLA was 5.9%, which represented the largest Social Security Cost-Of-Living-Adjustment in nearly forty years.
Since a lot can change in a few months, if you are on a fixed income, I wouldn't rush out and make any large purchases that are dependent on a record Social Security COLA to be affordable. Sadly much of your increase in retirement income via the Social Security COLA for 2023 will be eaten up by spending on necessities like food, electricity and gas.