Social Security retirees will get a huge increase in benefits in 2023. Their monthly checks will increase by 8.7%. This increase in benefits is the largest annual increase in pension payments in the past four decades.
Seniors may be delighted to see their payments increase so much. But there’s some really bad news about this boost in benefits that needs to be considered before you start counting your extra pennies.
Here’s the bad news about increasing Social Security benefits in 2023
While getting a raise is normally something to celebrate, increases to Social Security benefits (cost of living adjustments or COLAs) are a little different. They are not raises in the traditional sense, in that they do not come from an employer as a reward for good work. Instead, they’re built into the retirement benefits program to help ensure that Social Security benefits don’t decrease each year as prices rise over time.
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If no COLA were granted, Social Security checks would remain the same even as the costs of goods and services naturally increased. Eventually, retirees could buy very little with their benefits and find themselves in trouble. To avoid this, Social Security benefits increase in most years by a fixed amount calculated using a specific formula.
To calculate each year’s COLA, data from the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W) is compared on an annual basis. If the data shows that prices have increased in the relevant quarter of the year, seniors receive a COLA equal to the amount of the increase. Thus, the 8.7% rise in benefits in 2023 occurs because the CPI-W showed that prices increased by an average of 8.7% year-over-year.
Seniors will get more money from Social Security, but since everything they buy will also be more expensive, it won’t go any further. He will buy the same amount – or maybe less, if inflation continues to rise after the COLA calculation is complete.
There’s more bad news to know
Because COLAs are simply put in place to allow seniors to continue buying the same basket of goods and services rather than to help them gain ground, seniors will not end up with additional retirement benefits due of the 8.7% increase. At best, they will be able to retain the same purchasing power they have always had.
The bigger problem, however, is that seniors usually have income other than Social Security checks to help cover their costs. Usually, this money comes from investments or savings. And runaway inflation of the type that led to the 8.7% COLA isn’t good for savers or conservative investors (which most retirees should be).
Seniors who have money in a savings account will receive interest less than the rate of inflation. And since retirees can’t afford to take tons of risk with their investments, the return on investment in their portfolios can also be well below the rate of inflation. So their other sources of income are losing ground thanks to the price increases that led to the big COLA.
If you’re retired and see that bigger check coming in 2023, be sure to keep these factors in mind so you can be prepared for the reality of what your “extra” income will really buy.
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