Each year, Social Security benefits increase to account for cost-of-living changes over the last year. In 2021, check amounts increased by a whopping 5.9%. Apart from the 2008 adjustment, that was the only cost-of-living increase above 5% since 1990.
While we won’t know the exact increase for 2023 until October, the Consumer Price Index (the basis for the Social Security Administration’s cost-of-living adjustment) suggests an increase of at least 9%.
But is the highest cost-of-living increase in decades going to be enough for retirees living on a fixed income? To be brutally honest, no, it won’t be.
Here are eight reasons next year’s increase falls far short of the amount most seniors will need to retain their current standard of living.
Individuals over retirement age tend to spend more than the average public on health care costs, which is a problem for a few reasons, including the fact that fixed budgets can’t easily accommodate a sudden health crisis.
According to a 2016 survey, individuals 65 and older will spend three times as much on health care as those in their 20s and 30s. That’s an average of $11,300 annually.
Even more troubling, nearly 95% of Americans age 65 and older rely on Medicare, and Medicare costs are high enough to occupy a significant portion of retiree budgets.
One out of every four seniors says they’ve trimmed spending on essentials like food and utilities to compensate for health care costs. This number makes sense given that out-of-pocket health care costs for this age group jumped over 40% between 2009 and 2019.
Since 2022 isn’t over yet, it’s hard to predict how much that number increased this year. Still, current projections estimate Medicare hospital costs alone increased more than 5% in the last 12 months.
The average U.S. household spends over $4,000 a year on energy and utility costs. Retirees pay just $200 on average less than that, even though their median weekly income is nearly $200 less than their counterparts aged 55 to 64.
Put another way, retirees still have to spend roughly the same amount on utilities as they did pre-retirement while living on a reduced budget.
Worse, the U.S. Energy Information Administration estimates electricity prices increased 7.5% this year, but the Social Security cost-of-living adjustment (COLA) that went into effect in January 2022 was just 5.9%. That number proved far from enough to compete with the year’s rising utility costs.
Compared to costs in 2021, groceries are now more than 12% more expensive. That figure is just the average, though, since different types of food went up by different amounts.
Cereals, for instance, are 14% higher today than they were in 2021 while butter is more than 25% more expensive.
Compare that 12% leap to the predicted 9% COLA, and it’s easy to see why the Social Security benefits increase won’t be high enough for seniors on a fixed income.
Gas prices are finally dropping after a year of out-of-control price increases (and record profits for oil and gas companies across the world).
In one week in March, gas prices climbed by more than 55 cents, and American consumers have been struggling to find room for gas in their budgets ever since.
Now that gas is just 60 cents higher than it was this time last year, compared to an entire dollar higher earlier this summer, it’s a little easier to find ways to save money on gas.
Still, even if gas prices remain stable between now and the end of next year, that 60-cent increase will remain a huge burden on American budgets.
Other transportation costs
Gas (or electricity, if you’ve gone electric) is just one facet of your total transportation budget. Even the best car insurance rates are pricier now than last year. In fact, multiple auto insurance companies (including Progresive) hiked prices in July.
Cars themselves also cost more. Thanks to the combination of inflation and inventory shortages, used cars cost 37% more in July 2022 than they did pre-COVID-19.
Other modes of transportation besides cars cost more now too. For instance, while airfare in the first quarter of 2022 went down a bit from the fourth quarter of 2021, tickets still cost almost 17% more than they did in January 2021.
So, no matter how retirees plan to travel in 2023, transportation is guaranteed to cost more than it used to.
Prices in the housing market have been sky-high for the past two years, and while the housing market itself is finally starting to cool, other home costs aren’t.
Take home insurance. Per one estimate, around 90% of all U.S. homeowners experienced an insurance increase between last May and May 2022.
As with other cost-of-living changes, the exact amount home insurance went up this year varied by state.
Homeowners in Arkansas experienced an 18.5% insurance increase, for instance, while homeowners in New York saw a median increase of just 8%, lower than the national inflation rate.
Up to a million seniors move when they retire, some to be closer to family and others across the country to their dream retirement location.
Like everything else, moving now costs more than it did pre-pandemic, especially because moving has more, well, moving parts than a lot of tasks.
When selling a house, you have to consider home repair costs along with a cooling market that decreases your return on investment. Once you buy a home, you’ll have a higher mortgage rate and home insurance premium.
Plus, retirees often need to outsource labor-intensive moving tasks like packing boxes and filling a moving truck. The ongoing labor shortage means it will cost more to get help.
The cost of the lag between COLA and real-world inflation
The Social Security Administration only reevaluates Social Security benefits once a year, which isn’t necessarily a problem in years when inflation rates are consistent month over month.
Unfortunately, the 2022 COLA fell far short of the year’s overall inflation rate. As a result, many retired Americans struggled to maintain their lifestyles this year and now need next year’s increase to help make up the difference.
But since a 9% to 10% increase merely matches this year’s inflation rate, it isn’t enough to make up for the financial hit retirees took this year.
For individuals who took on more debt to pay bills this year (or who defaulted on bills they couldn’t afford to pay), an increased Social Security check might help maintain the status quo, but it can’t make up for money lost this year.
The year’s COLA coupled with strict budgeting and avoiding common scenarios that cause seniors to throw money away can help retirees stay afloat next year.
In the best-case situation, inflation will continue to increase in September (when the Social Security Administration looks at the Consumer Price Index to decide the year’s COLA), then fall afterward. Fingers are crossed for exactly this scenario.
Otherwise, retirees are likely looking at another rough year on a budget that doesn’t go far enough.
Rocket Money Benefits
- Automatically find and cancel subscriptions
- Slash your monthly phone, cable, and internet bills
- Save an average of up to $720 a year