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2023 Will Bring a Monster Social Security COLA. Here's How Much Your Benefits Check Could Rise.

The Motley Fool logo The Motley Fool 10/7/2022 Trevor Jennewine
2023 Will Bring a Monster Social Security COLA. Here's How Much Your Benefits Check Could Rise. © Provided by The Motley Fool 2023 Will Bring a Monster Social Security COLA. Here's How Much Your Benefits Check Could Rise.

Nearly nine out of ten people age 65 and older currently receive Social Security benefits, and the past year has been tough for many of those seniors. In 2022, the standard Medicare Part B premium climbed 14.5% to $170 per month. That figure accounts for 10.2% of the average monthly benefit paid to retired workers in August, up from 9.6% in 2021, meaning seniors had to shell out more of their Social Security checks to cover the cost of medical care this year. And that's only the beginning of the problem.

Not only did the 5.9% cost-of-living adjustment (COLA) enacted last year fail to cover to the rising cost of Medicare premiums, it also failed to keep up with inflation in general. Retirees have seen their benefits stretched thin by the rapidly rising prices of food, gas, electricity, and other necessities throughout the year. In fact, The Senior Citizens League (TSCL) estimates that the average Social Security benefit fell short by $417 year-to-date through August.

Fortunately, seniors are on pace to see a monster COLA in 2023.

October is a critical month for Social Security beneficiaries

Social Security beneficiaries are less than two weeks away from the big announcement. The U.S. Bureau of Labor Statistics is scheduled to release its September inflation report on Oct. 13, 2022, at 8:30am ET. At that point, the Social Security Administration will have all the data needed to calculate the COLA for 2023.

For context, COLAs are based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Specifically, the average CPI-W from the third quarter (July through September) of the current year is compared to the average CPI-W from the third quarter of the previous years. The percent increase (if any) becomes the COLA in the next year.

The chart below shows exactly how much the CPI-W has changed in each month this year compared to same month last year.

Month

Change in CPI-W

January

8.2%

February

8.6%

March

9.4%

April

8.9%

May

9.3%

June

9.8%

July

9.1%

August

8.7%

Data source: Social Security Administration.

Of course, only CPI-W data from the third quarter is factored into the COLA calculation, but examining the way inflation has trended over a longer time horizon can help contextualize the situation. For instance, if the COLA were based on July and August alone, beneficiaries could expect their Social Security checks to increase 8.9% next year. But the bigger trend indicates that inflation may have peaked in June, and several experts have taken that into account.

For instance, Mary Johnson of The Senior Citizens League estimates that the 2023 COLA will clock in at 8.7%, and Marc Goldwein of the Committee for a Responsible Federal Budget says "the COLA for next year will probably be closer to 9%, maybe even 8.5%, depending on what happens next month." In either case, that would represent the largest COLA in the last four decades.

How much Social Security benefits could increase in 2023

Many types of benefits are paid out through the Social Security program, but retirement benefits for former workers and their spouses, survivors benefits, and disability benefits are some of the largest categories.

Here is how much the average beneficiary in each of those categories would receive next year following an 8.5% COLA.

  • Retired workers: $1,814.94 per month (an extra $142.18)
  • Spouse of retired workers: $903.83 (an extra $70.81)
  • Survivors: $1,443.77 (an extra $113.11)
  • Disabled workers: $1,478.14 ($115.80)

Alternatively, here is how much the average beneficiary in each of those categories would receive next year following a 9% COLA.

  • Retired workers: $1,823.31 per month (an extra $150.55)
  • Spouse of retired workers: $907.99 (an extra $74.97)
  • Survivors: $1,450.42 (an extra $119.76)
  • Disabled workers: $1,484.95 (an extra $122.61)

Seniors should bear in mind that COLAs are designed to offset the impact of inflation. That means a monster COLA in 2023 won't leave anyone with extra spending money. The unfortunate truth is that most (if not all) of that extra income will be eaten away by rising prices. That means prudent financial planning is still critical.

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