The pain of high inflation is often the hardest on the fixed income budgets of current retirees. The only bright light from the relatively recent spike in inflation is the potential for a huge Social Security Cost of Living Adjustment (COLA) in 2023. Social Security’s 2022 COLA estimates (for 2023) were in the range of 8.6 to 10.5%. We haven’t seen a cost of living adjustment at this level since 2009.

The 2022 Social Security cost-of-living adjustment won’t take effect until January 2023. So retirees will likely continue to see their retirement income shrink over the next six months. The prices of everything you can’t live without seem to be rising, from mortgage rates or rent, to food and even health care.

June 2022 Consumer price index and social security

The Consumer Price Index (CPI) for June has just been released; it showed prices up 9.1% over the past twelve months, with no seasonal corrections. This is the largest year-on-year increase since the year of inflation ending in November 1981. Based on this CPI data, the Senior Citizens League estimated that the Social Security cost of living adjustment for 2023 could be a whopping 10.5%. significantly higher than last year’s Social Security COLA of 8.6%.

With an average Social Security benefit of $1,688 per month, a Social Security COLA of 10.5% for 2023 would translate to about $175 more per month in the pockets of the average Social Security recipient. Retirees receiving an above-average Social Security pension would see even larger increases in their monthly Social Security checks. This would be the largest increase in Social Security benefits since 1981. Imagine: we are in the middle of the Cold War, fighting with Russia. Reagan is president and Olivia Newton-John’s “Physical” hits #1 on the Billboard Charts.

Also keep in mind that a large Social Security COLA for 2023 could increase the taxes you pay on your Social Security benefits.

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To be clear here, we are only estimating where the Social Security COLA for 2023 will be based on current CPI data. If the Fed is able to bring the inflation numbers down quickly, we could see a smaller than expected Social Security COLA for 2023. Similarly, if inflation continues to rage, the Social Security COLA could be even larger than expected here. I don’t know anyone who expected inflation to disappear overnight. Hopefully it may start to decline, but I’d be surprised if it didn’t take some time to bring it back to the Fed’s target of around 2% per year.

How is the social security COLA calculated?

To calculate the actual Social Security COLA for 2023, the Social Security Administration (SSA) uses the average inflation in the third quarter, based on the CPI-W to calculate the increase in Social Security benefits for the following year. . For reference, the 2022 Social Security COLA was 5.9%, which was the largest Social Security cost-of-living adjustment in nearly forty years.

Since a lot can change in a few months, if you’re on a fixed income, I wouldn’t rush out and make major purchases that depend on a record Social Security COLA to be affordable. Unfortunately, much of the increase in your retirement income through Social Security COLA for 2023 will be eaten up by basic necessities like food, electricity, and gas.