Social Security and COLA: How Much Will Your Check Be in 2023?

Update October 13, 2022: Social Security COLA will be 8.7% for 2023.

If you’re retired or just about to retire, next year’s Social Security and COLA (cost of living adjustment) checks are likely to be one of the biggest increases on record for it, ever! The reason is no secret. It is a direct result of surging inflation which is now the highest in over 40 years.

Older woman’s hands around coffee representing Social Security and COLA

While we don’t know yet exactly, the average beneficiary could be looking at an increase in the benefit monthly check amount of as much as $180 (or even more) starting next January. That would be another $2,260 a year and that number is based on the current inflation rate we’ve all experienced over the past year.

Even if it is just based on the most recent rate of inflation (just the past few months), it is almost a certainty that checks will go up at least an extra $120. That is a huge number.

So How Do We Know That These Are THE Numbers?

Figuring out these numbers for Social Security and COLA is based on the Social Security Administration’s own figures. The numbers are run by the Center for a Responsible Federal Budget, a well-known Washington, D.C. think-tank. That process is done regularly and when inflation is running this high, the numbers can get very lofty. These current projected higher payments are very welcome news for retirees.

All of us, but especially retirees, have seen their household finances squeezed badly so far this year as a result of skyrocketing inflation and turmoil in the financial markets.

Reminder of the Numbers as of Right Now

The consumer price index (CPI) rose by 8.6% this year through May, way ahead of the 5.9% annual inflation adjustment handed out to Social Security beneficiaries last January. The numbers for June, which some think will show some improvement in the inflation figure, are due out next week. Will it be good news?

Even if the inflation numbers are peaking and leveling off, the hit retirees have taken with their savings, stocks and bonds has caused their portfolios to slump and set them way back in trying to live on that in retirement this past year. And of course, if you haven’t saved properly for retirement, you are in an even bigger mess of trouble.

Living on a Fixed Income Is Really a Dangerous Thing During Inflation!

Anyone living on a fixed income is being hit especially hard by inflation. To account for inflation, those folks have lost almost 9% of their purchasing power this year. Inflation of 2% to 3% a year at most for decades has been the acceptable and expected rate of inflation…until now. That means nothing but trouble.

When Will We Get the Official News About Social Security and COLA?

It will not be until this October that the Social Security Administration will officially announce the annual cost-of-living adjustments for 2023. But the formula it will use is public and we already have some of the numbers they will use. Can we make a good estimate now? Yes, we can.

The annual COLA was first instituted during the inflationary period of the 1970s. It was calculated by comparing consumer prices each summer with the prices of the previous summer. The Social Security Administration looks at the average monthly changes for July, August, and September, and then compares them to the average for the same three months of the previous year.

Based on that math, we are already on track for a cost-of-living adjustment for 2023 of at least 7.9%. That’s pretty much a guaranteed minimum.

What is the reason? May’s increase (or CPI figure) is already 7.9% and that is above the averages for last summer. So even if there are no further price rises in the economy at all for the rest of the summer and the rest of the year (and we already know that isn’t going to happen), we’re looking at least at an increase of 7.9% over last year’s benefit. Based on that, the average Social Security recipient’s current benefit of $1,657 a month would increase by $120 extra dollars a month in January 2023.

Will It Be Even Higher Than 7.9%?

Nobody thinks consumer prices stopped rising on May 31st and will stay flat for the rest of the year. The estimates are that if inflation carries on in its rising at its most recent rate, the next COLA could be a stunning 10.8%. For someone who currently is receiving just the average monthly benefit, that would mean another $180 a month!

It’s good news for retirees, but only up to a point. The extra money doesn’t represent a windfall, it just tries to make up for the rising cost of household expenses that has been such a weight for the past year.

Why Inflation Actually Hurts Social Security Beneficiaries Even More Than Others

If you have a job now—or you at least returned to your old one—there’s a good chance your income has gone up already, even during this inflation. That helps.

This year, salaries have increased in the U.S. by about 5% and although that’s not keeping up with the inflation rate, it is a help. Wages have been stagnant for decades so any increase in them helps.

But for Social Security folks, it’s different. These cost-of-living adjustments only come after the fact based on the previous year’s inflation, so they are always losing ground to inflation until they get a catch-up benefit increase.

Will You Have to Pay Taxes on Your Extra Money?

Yup, rising inflation means more retirees will end up being taxed (double taxed, actually) on their new benefits. That’s because Congress introduced Social Security taxation in the 1980s and set income thresholds which cleverly avoided indexing them for inflation. With this big increase, some retirees will spill over into the taxable income bracket calculation and again lose some money. More and more of that is happening every year.

Final Thoughts

If you aren’t collecting a Social Security check yet, you still need to understand about COLA and its impact on retirees. One day it will be you and if there still is a Social Security system (I’m guessing there will be), you need to understand it.

In any event, you probably have family members, parents or grandparents, who depend on it, so at least be understanding about it when talking to them about their financial situation.

Next week more info will be out and the benefit puzzle will have more answers. Look for it.

Do you think inflation has peaked? How are you handling the high inflation and what changes are you making to cope with it? Can you see light at the end of the inflation tunnel?


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