Today, many seniors rely heavily on social security to make ends meet. And that’s not necessarily a good thing.
The problem with Social Security is that there is a lot of misinformation around it. And a common myth is that the benefits are designed to fully replace workers’ paychecks before retirement.
In reality, for the average worker, social security will replace about 40% of early retirement income. And most seniors need about twice that amount to live comfortably.
It’s for this reason that many Social Security recipients eagerly await news of a cost of living adjustment, or COLA, each year. Those who get most or all of their income from the program could be banking on a big increase for 2023, especially given soaring inflation this year.
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In this regard, there is good news. We are only a month away from the announcement of COLA 2023 by the Social Security Administration. And once that information is known, seniors will have a better idea of what their benefits will look like next year. The bad news, however, is that even a giant raise may not leave recipients in a more financially secure position.
Why COLAs are announced in October
Social Security COLAs are based on data from the third quarter of the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W), which measures fluctuations in the cost of consumer goods. Specifically, what happens is that the CPI-W readings for the third quarter of the year are compared to those of the previous year. If the average value increases from year to year, benefits are boosted.
At this time, it is too early to tell what next year’s Social Security COLA will look like, as we have not completed the third quarter of the year. But the September CPI-W data should be available on October 13. And once that information is available, the Social Security Administration should be able to calculate and announce a COLA for 2023.
Next year’s COLA could be huge
This year, seniors got a COLA of 5.9%, and it was the biggest increase in benefits in decades. Based on recent estimates, it looks like the 2023 COLA will be even bigger. Some estimates, in fact, have even called for an increase of nearly 11%, although that may push it.
Of course, many seniors are banking on a giant increase for 2023. But it’s important to remember that Social Security benefits only increase dramatically when inflation dictates that kind of increase is needed.
Thus, a large increase for 2023 will not necessarily give seniors more purchasing power. In the best-case scenario, they will break even, which means they will get enough of an increase to maintain their purchasing power, but gain none.
In fact, it’s easy to argue that a big increase in Social Security isn’t even a good thing, because it means living expenses are that much higher. And so, no matter what the COLA of 2023 looks like, many seniors could still find themselves strapped for cash in the coming year, just as they are now.
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