It’s no secret that inflation is wreaking havoc on many people’s budgets these days. With everything from gasoline to utilities to clothing to groceries costing more, many consumers are struggling to make ends meet.
Older people are in a similar boat. Many retirees who get most of their income from Social Security are struggling to keep up with living expenses, and that comes on the heels of the program’s most generous cost-of-living adjustment (COLA) in decades.
In fact, recent estimates indicate that seniors on Social Security may be in line for an 8.6% COLA in 2023. Of course, it’s too early to say for sure what next year’s COLA will look like because that number is based on the inflation data for the third quarter of the year and, well, we’re not there yet.
But either way, it seems likely that seniors on Social Security will see their benefits increase substantially in 2023. Whether that’s a good thing, though, is up for debate.
Why seniors shouldn’t expect a giant raise
There are two types of raises that employers usually give. One is a cost-of-living raise and the other is a merit raise. Merit raises are based on performance and tend to be the more generous of the two. After all, the point of a cost-of-living raise is simply to raise wages enough for workers to keep up with rising expenses, whereas a merit raise might help a given employee get ahead. financially.
In the context of Social Security, there is no such thing as a merit-based COLA. Rather, COLAs are based on inflation data and are intended to help seniors preserve their purchasing power as living expenses increase.
But when COLAs rise substantially, it’s only because the costs of living are doing the same. And often, even when Social Security gets a good COLA, it’s not really enough to help seniors stay afloat.
That’s why Social Security beneficiaries really shouldn’t want a big COLA by 2023. If that 8.6% increase comes to pass, rising costs of living are likely to keep seniors financially behind even once increase your profits.
Part of the reason for this is the way COLAs are calculated. In a nutshell, the COLAs are based on data from the Consumer Price Index for Urban Wage and White Collar Workers (CPI-W). But the CPI-W does not really reflect the costs commonly faced by older people.
For years, advocates for older people have proposed using an index specific to older people, the CPI-E, or Consumer Price Index for the Elderly, to calculate COLAs and make them more equitable. But that idea has yet to gain traction to the point where it becomes a reality.
Older people have been losing purchasing power for a long time
Seniors on Social Security have been steadily losing purchasing power since 2000. And a large COLA by 2023 won’t necessarily do much, or anything, to address that problem. That’s why waiting for a big COLA doesn’t really pay off. Instead, what seniors should hope for is lawmakers changing the way those raises are calculated to begin with.
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