Social Security's 2023 COLA Will Be Smaller Than Expected. That's a Good Thing.

Next month, the Social Security Administration will announce the cost-of-living adjustment (COLA) for 2023.

This adjustment is supposed to help benefits keep pace with inflation. And because inflation has surged at a historic pace this year, retirees can expect a significant boost in benefits.

However, while we won't know the official COLA until mid-October, there are signs suggesting that it may not be as large as expected. Here's why that's actually a good thing.

Image source: Getty Images.

How much will retirees receive from Social Security in 2023?

Last month, researchers at The Senior Citizens League predicted that the COLA for 2023 could be as high as 10.1%. Based on the most recent Consumer Price Index data, however, they now expect it will be around 8.7%.

While that may be disappointing for retirees expecting a massive boost in benefits, a smaller-than-expected COLA is a promising sign for one reason: It means inflation is slowing down.

The annual COLA is not so much a raise as it is a way of helping Social Security maintain buying power. A high COLA doesn't necessarily mean you'll have more spending money. Rather, it means inflation is surging. A lower COLA, then, suggests that inflation is rising at a slower rate.

For example, in the 12 months ending August 2021, inflation increased by 5.3%, according to the Bureau of Labor Statistics. Shortly after, in October 2021, retirees saw a COLA of 5.9%. This year, in the 12 months ending August 2022, inflation surged by 8.3%. And now, experts are anticipating a COLA of around 8.7% for 2023.

Source: U.S. Bureau of Labor Statistics and the Social Security Administration.

In other words, the annual COLA tends to follow the inflation rate, and a smaller-than-expected COLA means prices could be on their way back down.

The bad news about next year's COLA

The positive news is that inflation seems to be cooling down, and a boost in benefits can bring much-needed relief for seniors. The average retiree will collect around $144 more per month with an 8.7% COLA, which can go a long way toward affording everyday essentials.

However, the bad news is that despite annual COLAs, Social Security has still been consistently losing buying power.

This is partly due to the fact that the COLAs are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W tracks the spending patterns of working-age Americans, which can be vastly different from the spending patterns of retirees. As a result, key expenditures for seniors like housing and medical care are underrepresented when calculating the COLA.

Over time, this has made it harder for Social Security to keep pace with seniors' actual spending levels. In fact, since 2000, benefits have lost around 40% of their purchasing power, according to a report from The Senior Citizens League.

To be clear, the annual COLAs are still helpful for seniors, especially when inflation is surging. Just be sure you're keeping your expectations in check because this extra money may not go as far as you think.