Social Security 2023: Is the New COLA Enough To Fight Inflation?
In an effort to keep up with record-breaking inflation, the Social Security Administration recently announced its biggest cost-of-living adjustment in more than four decades. The 2023 COLA is 8.7%, meaning that the average Social Security check will increase by around $140 beginning next year.
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Though 8.7% is a historically high adjustment — and the highest since 1980, when the COLA was 14.3% — you may be wondering if this is enough to match inflation. There’s no simple answer here, and it really depends on the financial situation of the Social Security recipient.
“We believe that the Cost-of-Living Adjustment (COLA) for Social Security will go a long way in reducing the sting associated with rising inflation that retirees have experienced over the past 12 months,” said Brian Mawhinney, CFP, CRPC, head of financial planning with MassMutual. “However, it may not be enough for everyone. Despite the rise in the cost of living, it is important to keep in mind that the way retirees experience these price changes is unique to their personal situation,”
Here are some factors that play a role in whether the new COLA is enough to keep up with inflation.
Housing
“A retiree without a mortgage, or with a fixed mortgage, may not feel the pinch of rising housing costs in the way a renter might,” Mawhinney said. “Housing plays a large role in determining a client’s monthly fixed expenses in retirement, and low interest rates have brought about many changes to the housing markets over the past several months.”
Location
”Geography will also play an important role as we head into the winter months,” Mawhinney said. “Colder climates will likely feel the pinch of rising energy costs, while urban residents may absorb higher expenses than those retirees located in more rural areas.”
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Discretionary Expenses
“We find that retirees tend to forego certain discretionary expenses, such as travel for leisure, when they feel a constraint on their monthly budget,” Mawhinney said. “Furthermore, as retirees age, they tend to become less socially active due to physical limitations and the loss of loved ones.”
Despite this tendency, other financial experts are staunchly unconvinced that the new COLA will be enough to match inflation.
“COLA fails to sufficiently keep up with inflation, despite the fact that by nature COLA is indeed designed to keep up with present inflation,” said Ethan Caffrey, a certified financial advisor and the marketer CEO of Storific. “There will be an 8.7% increase for Social Security recipients, being there was an 8.7% increase in this year’s CPI rate; however, the 8.7% increase in CPI happened in the previous year and recipients are only collecting their 8.7% increase from 2023 and beyond.”
He added, “What about the fact that everything was already more expensive last year? How are recipients supposed to cover that, as there isn’t a retroactive increase? As a result, given the current nature, recipients are always behind the eight ball. To sum it up, the fact that the increase lags behind the increase in CPI means that recipients’ benefits are reduced.”
Hopefully inflation will cool down in 2023 (as it is projected to), and the COLA will go further for retirees.
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This article originally appeared on GOBankingRates.com: Social Security 2023: Is the New COLA Enough To Fight Inflation?
