The biggest increase in Social Security benefits in four decades will deliver much-needed breathing room for millions of Social Security recipients.
The Social Security Administration, the federal government agency that oversees the benefits, announced a 8.7% increase in the Social Security cost-of-living adjustment (COLA) for 2023.
The increase is the largest since 1981, when the COLA was 11.2%, and raises the average retiree benefit by more than $140 per month starting in January, according to the Social Security Administration.
The adjustment — coupled with a decrease in Medicare Part B premiums next year — will make a critical difference in making ends meet for the more than 70 million retired senior citizens and disabled workers who have grappled this year with mounting prices for everything from electric and natural gas bills to groceries and monthly rent.
“Today's COLA announcement is excellent — and important — news for retirees,” Nancy Altman, president of Social Security Works, told Yahoo Money. “The annual COLA is a key feature of Social Security, one that private-sector pension plans lack. It keeps benefits from eroding over time … [but] it is essential to recognize that the COLA is not a benefit increase. It simply allows beneficiaries to tread water in the face of rising prices.”
Folks who receive Social Security benefits are typically notified by mail in early December about their new benefit amount. Most beneficiaries can also view their COLA notice online through their personal my Social Security account at www.socialsecurity.gov/myaccount.
The jaw-dropping bump-up was stoked by the soaring cost of groceries, gas and other goods and services since July. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was 8.5% year over year in September, down from 8.7% in August.
The COLA is calculated by averaging together the CPI-W consumer price index for the third quarter of the year – July, August, and September of 2022 – and then comparing that figure with the same data last year.
The once a year inflation adjustment began in 1975 under a formula made into law by Congress. And it goes a long way in helping beneficiaries stay abreast of increasing day-to-day living costs.
“We hear a lot about how retirees live on a fixed income,” Anqi Chen, a senior research economist and the assistant director of savings research at the Center for Retirement Research at Boston College, told Yahoo Money.
“Social Security is definitely not fixed income because it is indexed to inflation," Chen added. "The COLA prevents retirement income from being eroded away by inflation. That is a wonderful feature of Social Security because many retirees rely on Social Security for a large chunk of their retirement income. For the typical retiree, it covers about half of their retirement income. To have half of your income indexed to inflation is a big help, especially when prices are increasing.”
This year, 27% of retirees reported they’re spending much higher or a little higher than they can afford, versus 17% in 2020, according to the findings in the Employee Benefit Research Institute (EBRI)’s 2022 Spending in Retirement Survey. Seven in 10 say Social Security is a major source of their income.
"The combination of a COLA this high, and the fact that Medicare Part B premiums went down is a once-in-a-lifetime event,” Mary Johnson, a Social Security policy analyst for The Senior Citizens League, told Yahoo Money. “This is probably as good as it will get.”
In the meantime, it's too early to say how well the 8.7% COLA will keep pace with inflation in 2023. The 5.9% COLA received this year has fallen short by 50%, according to Johnson.
“Now let's watch to see if inflation comes down gracefully, instead of popping and deflating,” Johnson said. “That soft landing might mean that inflation slows in 2023 and people wind up with a small COLA of about 2% in 2024. The pop and deflate would mean no COLA in 2024 due to deflation and that brings a whole set of different issues. Pop and deflate occurred in 2010 and 2011 after the Great Recession.”
Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon