This year, Social Security benefits went up by a whopping 8.7%. That’s the highest Social Security increase in 40 years! 1
In the world of Social Security, this increase is called the cost-of-living adjustment (COLA for short). Basically, COLA is used every year to help recipients of Social Security and Supplemental Security Income (SSI) cover the rise in the price of food and just about everything else due to inflation. (A trip to the grocery store seems to cost an arm and a leg these days!)
In their January 2023 payout, retirees, people with disabilities and others who receive Social Security should have seen a spike from their December 2022 benefit. This means they’ll have a little more cash in their budget to make ends meet.
How Much Will Social Security Increase in 2023?
If you got an 8.7% raise at your job, you might celebrate with dinner out. (Chili’s, here we come!)
But let’s take a look at how the 8.7% COLA works out in dollars and cents for retirees.
The average Social Security benefit for a retired worker in 2022 was $1,681. COLA increased that benefit by $146 a month to $1,827.2 (We’ll do the math for you: That’s a total benefit of about $22,000 a year compared to roughly $20,200.)
Okay, $146 might seem like a nice chunk of change, but most of that money’s going to be eaten up by inflation, which was 6.5% in December of 2022.3 And really, that’s the point of COLA. It’s not a merit-based pay raise or a stimulus check. It’s meant to help those using Social Security combat inflation and keep some of their purchasing power. (Purchasing power basically means how far your dollars go to cover the price of things you want to buy.)
What Is COLA?
We gave you a quick definition earlier, but let’s dive deeper. COLA is an annual increase in Social Security benefits based on the consumer price index (CPI), an economic tool that measures inflation.
So, what does all that mean? When inflation rises, so does COLA. And since inflation hit 40-year highs in 2022, that caused COLA to also reach a 40-year high. (Didn’t see that coming, right?)
What Is the History of COLA?
Now that we know what COLA is, let’s look at how it came to be. Way back in the day, politicians used to vote to increase Social Security benefits (and since politicians like to politicize things, yes, it became politicized). So, in 1975, the Social Security Administration (SSA) started automatic COLA. This means that COLA automatically adjusts every year based on the CPI. The SSA usually announces COLA each October.
2023 is the second year Social Security recipients got a big bump. The 2022 COLA was 5.9%. For the decade before that, the average increase was just 1.65% per year.4 (We also had much lower inflation during those years.)
While COLA has never been negative, it was 0% in 2010, 2011 and 2016.5
Medicare Premiums Won’t Eat Up COLA
If you receive Social Security and are enrolled in Medicare Part B (standard Medicare insurance), your monthly premium is automatically deducted from your Social Security check.
The good news here is that Medicare Part B premiums went down by $5.20 to $164.90 in 2023. That means your COLA won’t be eaten up by higher Medicare premiums.6
Don’t Depend on Social Security in Retirement
Like we said earlier, the average Social Security benefit is $1,827 a month.7 If Social Security is all you have for retirement, you could end up in a pretty tight spot if you’re trying to live on less than two grand a month.
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And some seniors find themselves in that spot. About 12% of men and 15% of women over the age of 65 rely on Social Security for 90% or more their income. Social Security makes up more than half of the income for 37% of men and 42% of women over 65.8
Not to mention, Social Security is facing a financial shortfall that will keep it from paying full benefits by 2034.9 You can’t count on Uncle Sam to take care of you in your golden years!
That’s why it’s best to save for retirement and build your own nest egg. The best way to do that is to invest 15% of your gross income into tax-advantaged accounts like a 401(k) and a Roth IRA.
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