Rising prices have put a significant financial strain on the U.S. economy this year, forcing many Americans to dip into their savings just to make ends meet. This has been especially challenging for retired workers on Social Security, with 85% saying that rising prices are stretching their budgets, according to a recent survey from The Motley Fool.
On the bright side, Social Security beneficiaries will receive one of the largest cost-of-living adjustments (COLAs) in history next year. COLAs are applied to Social Security benefits to offset the trend of the cost of living getting higher each year. The Social Security Administration calculates these COLAs by tracking changes in the third-quarter Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from one year to the next.
Unfortunately, the 5.9% COLA applied to benefits in 2022 significantly underestimated the pace of rising prices. In fact, annualized inflation has exceeded 5.9% every month this year. This means that Social Security benefits lost buying power this year, hitting retired workers hard, based on Lorie Konish’s article.
The average benefit paid to retired workers in January 2022 was $1,657 per month. However, if the COLA had been 8.8%, the average benefit would have been $1,702 per month. This means that the average retired worker should have received an extra $45 in monthly income from Social Security, resulting in a shortfall of $540 for the year.
Next year, according to the Social Security Administration, Social Security benefits will receive an 8.7% COLA, which is the fourth-largest COLA in the program’s history. While the size of the COLA is impressive, what really matters is how it compares to inflation. And with inflation decelerating since its peak in June, the 2023 COLA could overestimate the impact of rising prices.
This could help Social Security benefits regain some of their lost buying power, providing good news for retired workers. However, retired workers should continue to budget cautiously as there is no guarantee that the trend of decelerating inflation will persist.