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Retirees Are on Track for a Huge Social Security Raise — Why That’s Concerning News

In 2023, retirees are most likely going to get a much bigger Social Security check than they are entitled to receive in 2022. In fact, their benefits bump will be the biggest in four decades.

Although this sounds like a great thing, the sad reality is that it’s really bad news that seniors will be getting so much extra money. Here’s why.

Image source: Getty Images.

Seniors could see an 8% raise next year

Seniors on Social Security receive periodic cost of living adjustments (COLAs) when a consumer price index called the CPI-W shows that the price of goods and services is increasing. Third-quarter data is used to determine the benefits bump, and this is not available yet — so the Social Security raise won’t officially be announced until October. 

Still, based on current trends in pricing, it’s clear retirees can expect to see a lot more money in their checks next year. In fact, Stephen Goss, the chief actuary of the Social Security Administration, recently commented on the issue in 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. 

An 8% benefits increase would be the largest annual raise for seniors since 1981, when there was a 7.4% COLA. It’s far higher than this year’s 5.9% increase, and it could add over $100 to the average retiree’s monthly payment. 

How can a big Social Security benefits bump be a bad thing?

Getting a huge Social Security raise sounds great since everyone likes getting more money. There’s just 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 just designed to help ensure retirees don’t lose buying power.

When the cost of goods and services increases, each Social Security check would buy less if seniors didn’t get periodic benefits increases. Unfortunately, the formula used to determine how big each increase will be is based on a measure of inflation that tracks how prices have changed for the basket of goods and services traditionally purchased by urban wage earners and clerical workers. As a result, it often underestimates the actual inflation retirees experience, since seniors have different spending habits.

Even if the COLA formula were an accurate measure of senior spending, seniors still wouldn’t end up better off as a result of their raises since the amount of their benefits increase is solely based on how much the prices of the items they buy have gone up. In simple terms, if the price index shows 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 seniors won’t end up with more buying power despite a big COLA, and they could end up with less money than they actually need to keep pace with inflation since the formula used to determine their raise isn’t the best. And if that weren’t bad enough, it’s also important to remember that retirees don’t just rely on Social Security — they also require savings, since their benefits aren’t enough to live on. 

Inflation isn’t great for savers, especially those with more conservative portfolios, as seniors tend to have. When prices go up 8% but seniors don’t earn 8% returns on their invested funds, their retirement accounts won’t go as far. 

Unfortunately, this will mean retirees may need to adjust their spending habits and look for ways to cut costs as inflation surges — despite a huge Social Security raise. 

 

The Motley Fool has a disclosure policy.

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