The biggest increase in 40 years: in 2023, US pensions will increase by 8,7%

As expected, on October 13, the Social Security Administration (SSA) announced the largest annual cost-of-living adjustment (COLA) in more than four decades. Retirees will receive an 8,7% increase in their monthly payments in 2023. Writes about it GOBankingRates.

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The announcement follows the latest US Department of Labor report on the Consumer Price Index (CPI), which showed headline inflation rose 8,2% in September from a year earlier.

On average, Social Security benefits will increase by more than $140 per month in 2023, according to the SSA. 8,7% COLA will start with pensions paid out to over 65 million recipients in January 2023. The increase in payments to more than 7 million Supplemental Security Income (SSI) recipients will begin on December 30, 2022.

COLA 2023 is the biggest annual increase since adjusting 11,2% in 1981. Over the past 40 years, the next highest COLA was the 2022 jump of 5,9%. Only the second time in this period that COLA rose more than 5%.

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According to David Freitag, financial planner and welfare expert at MassMutual, the 2023 adjustment should help seniors cope with soaring inflation.

“When Social Security COLA goes up a little, like from 1% to 2,5%, people don't really see the value of increasing their living wage adjusted retirement income,” he said. “However, when you have tangible increases like 5,9% and 8,7%, it's easy to see how valuable this adjustment is to support retirees. For most retirees, their Social Security income is one of the very few guaranteed sources of income that automatically adjusts for rising costs of living.”

According to a study published by Motley Fool, one in five retired married couples and 45% of single retirees are more than 90% dependent on Social Security benefits.

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COLA is based on the Consumer Price Index for Urban Employees (CPI-W), not the Consumer Price Index for the Elderly (CPI-E).

Many advocates say the CPI-E would be a better indicator because it provides a more accurate means of calculating Social Security COLA.

But 2022 was one of those rare years when the CPI-W calculation could be useful for retirees.

“Unlike most previous years, CPI-E has actually been a bit softer than CPI-W,” said Matthew Frankel, a certified financial planner and analyst at The Motley Fool. “So while the way COLA is calculated is not beneficial for older adults in most years, COLA 2023 is an exception.”

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