Social Security 2023 COLA: How It Works
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The Social Security benefits cost of living adjustment (COLA) is 8.7% in 2023. The average increase for beneficiaries was more than $140 per month, according to the Social Security Administration.
The 2023 Social Security COLA is the largest cost-of-living increase in more than 40 years.
“Medicare premiums are going down and Social Security benefits are going up in 2023, which will give seniors more peace of mind and breathing room,” Kilolo Kijakazi, acting commissioner of the Social Security Administration, said in a press release .
A COLA increases a person's Social Security benefit for the calendar year. An increase only takes place if inflation, as determined by the law that governs the COLA, is above 0%. Since 1975, there has been a COLA every year except three.
The Social Security Administration has applied COLAs to Social Security benefits and Supplemental Security Income (SSI) benefits since the 1970s to keep payments in line with inflation.
Without a COLA, a Social Security benefit's purchasing power — the amount of goods and services you can purchase with a set amount of money — would erode over time.
The Social Security Administration uses the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, to calculate each year’s COLA. The CPI-W is part of the overall Consumer Price Index, which measures the average change in prices consumers pay for goods and services such as food, fuel and medical care .
This is how Social Security determines the COLA amount:
Start with the CPI-W for the third quarter of the most recent calendar year. The third quarter includes all of July, August and September.
Compare that to the CPI-W for the third quarter from the previous calendar year.
Round the difference to the nearest one-tenth of one percent.
There is no COLA if the change in CPI-W, after rounding, is zero or lower.
The COLA takes effect the following January for most recipients of Social Security retirement benefits. For example, the 8.7% COLA in January 2023 was the result of comparing inflation for the third quarter of 2022 to inflation for the third quarter of 2021.
For SSI benefit recipients, the 2023 COLA technically took effect in 2022 — on December 30.
Is the COLA guaranteed to keep up with inflation?
A Social Security cost of living adjustment shores up benefits against inflation. For example, a person who retired in 2000 with a monthly benefit of $1,000 would have a benefit of $1,720 in 2023 — helpful when the average price of a loaf of bread rose from just under a dollar to nearly $2 during the same time. But rising prices can still pinch retirees. Here’s why:
People experience inflation differently. The CPI-W captures a range of prices, but it has shortcomings. Each retiree’s monthly budget is unlikely to match the CPI-W perfectly. A retiree might use medical services more than the index presupposes. Other retirees might live in an area where food prices differ significantly from the national average.
COLAs are slow to adjust to economic reality. The COLA in effect for 2023 is based on price changes that took place between 2021 to 2022. If Social Security makes up a big percentage of a retiree’s income and inflation runs high, it can be difficult to cope with rising prices until future COLAs catch up.
The SSA began issuing COLAs in 1975, and the highest adjustments were in 1980 (14.3%) and in 1981 (11.2%). Since then, adjustments have remained in the single digits. Here are some recent Social Security benefits COLAs .
COLA (for following year)
Source: Social Security Administration.
Social Security's latest COLA increase illustrates how inflation affects spending power. Although there’s no easy fix to inflation, these tips can help you keep as much money as possible in your pocket.
Prioritize paying down debt. Especially focus on paying down debt with high-interest rates, such as payday loans.
Make sure you’re aware of your spending. “It all comes back to cash flow,” says Travis Tracy, a certified financial planner and the founder of Fortitude Financial Planning in Durham, North Carolina. “That’s what I work on with my clients: sitting down and seeing where everything’s going.” Review your bank statements to see past expenses, or download a budget app that automatically tracks your spending.
Use a gas app to find the cheapest fuel in your area. Tracy also recommends clustering weekly errands on one or two days to reduce fuel spending.
Make sure you’re paying as little as possible for the services you need. Pick up the phone and call the companies behind the bills you pay, and politely request to have your bills lowered, paused or deferred.
Ask for help. You can call 211 or visit 211.org for assistance related to housing, food, health care and other essential services.