Each October, the Social Security Administration announces the cost-of-living adjustment for Social Security benefits for the following year. The COLA is tied to the rate of inflation. With 40-year highs in price increases, the 2023 Social Security COLA aims to help retirees continue to pay for higher living expenses.
When including the Social Security COLA in your retirement budget, it can be helpful to:
— Understand the history of the COLA.
— Look at what the COLA will be for 2023.
— Align monthly costs with the benefit amount.
— Consider ways to maintain your lifestyle.
— Take measures to prepare for the future.
[Read: Social Security Changes Coming in 2022.]
The History of the Social Security COLA
Congress enacted the COLA provision in 1972, and it became effective in 1975. Its purpose is to ensure that Social Security beneficiaries do not have their funds eroded by inflation. “The COLA is an annual adjustment to Social Security benefits that is meant to keep pace with the cost of living,” says Michael Collins, a chartered financial analyst at Endicott College in Beverly, Massachusetts. The COLA is calculated using the annual change in the Consumer Price Index for Urban Wage Earners and Clerical Workers. If there is no increase, no adjustments are made. If this measure of inflation rises, a COLA is paid out beginning in January.
In 1975, the first COLA was 8%. Since then, the highest COLA was 14.3% in 1980. In some years, including 2010, 2011 and 2015, there has been no COLA. The COLA paid out in 2022 was 5.9%.
When the COLA becomes effective, Social Security beneficiaries usually notice the change. “One way that the COLA can impact retirees is by increasing the amount of income they will have each year,” Collins says. For example, if the COLA is 5%, a retiree who receives $1,000 a month in benefits will have a $50 increase.
[READ: How Much You Will Get From Social Security.]
The 2023 Social Security COLA
In 2022, price hikes have been the largest that consumers have experienced in 40 years. “Based upon the high levels of inflation we’ve experienced in 2022, retirees can expect a large increase in their Social Security benefits in 2023,” says Randy Dippell, a wealth advisor and owner of Milestone Money in Chicago. In August, the Consumer Price Index, which measures the average cost of living expenses, climbed by 8.3%. The rate indicates how much the average price of basic goods and services increased from August 2021 to August 2022.
The COLA is given to help retirees maintain their lifestyle and accommodate for inflation, and the 2023 adjustment will reflect rising prices. “That extra cash will provide immediate relief to retirees on a fixed income,” Dippell says. It could make retirement budgets able to cover the cost of groceries, housing and gas, all of which have risen during 2022.
In September 2022, Medicare announced that 2023 Part B premiums would decrease slightly. “Since Medicare costs come out of many people’s Social Security income, the COLA applied to their benefit should be more noticeable,” says Brian Kuhn, a senior vice president and financial advisor at Wealth Enhancement Group in Fulton, Maryland.
[See: 10 Social Security Rules Everyone Should Know.]
Rising Prices and Fixed Income
Once the COLA is announced, it may be easier to plan your retirement budget based on the benefit adjustment. “You can implement it into your budget for next year,” Dippell says. “The fourth quarter is a great time of year to conduct a check up of your finances, plan for any actions that need to be resolved before year end and then start thinking about the year ahead.”
It can be helpful to compare what you spent during the past year to current prices to see how your personal expenses have changed. If you’re short on funds, look for ways to save money, such as buying staple goods in bulk or cutting back on subscriptions and services. “Review any important upcoming purchases you had planned that may be subject to price increases,” Dippell says.
Variable interest rates on debts could be impacted by inflation. If you have loans set up at interest rates that are adjusted for inflation, you might see payments increase. “If appropriate, consider paying down variable interest rate debts or refinancing them to fixed rates,” Dippell says.
Also, look at your insurance policies for your home and vehicles. “Review your coverage amounts to ensure they are adequate for your needs,” Dippell says. You might be able to reduce premium costs, especially if you need less coverage now than before.
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Why Seniors Are Getting a Large Social Security COLA in 2023 originally appeared on usnews.com
