Social Security payments and inflation—what to do if one doesn’t keep up with the other

It’s a big concern: About 66 million Americans receive SS benefits, with nearly 9 out of 10 people over the age of 65 getting the payments. 

To help recipients keep up with inflation, SS cost-of-living adjustments (COLAs) are made annually using a formula legislated by Congress that factors in changes in the CPI. In recognition of today’s rising expenses for food, fuel, and other goods and services, the SS Administration on October 13 announced that the COLA for 2023 will be 8.7%, the largest jump since 1981. It follows another big increase of 5.9% in the COLA announced last fall that applied to this year’s SS benefit payments.

Despite the historically large COLAs for 2022 and 2023, many older Americans will still find it challenging to maintain their standard of living given the impact of rising inflation. The formula used to set COLAs doesn’t align the adjustments precisely with inflation, creating budgeting challenges for retirees who may need to supplement their SS payments with income from invested savings.

What to do when Social Security payments don’t keep up with inflation

While you don’t have control over rising prices, you can take steps to address the spending side of your financial life. Here are three things to track.

1 Manage your medical expenses—For those over the age of 65, medical bills are among the biggest financial concerns, and understanding the ins and outs of Medicare is an important part of managing your retirement finances. Medicare coverage starts when you sign up, and the initial enrollment period lasts seven months, including three months before you turn 65 and three months after you turn 65. If you’re enrolled in SS and Medicare Part B—the part that provides standard health insurance—the SS Administration will deduct the premium from your monthly SS check. While Medicare premiums will marginally decrease in 2023, it’s prudent to plan ahead. Medicare open enrollment runs from October 15 through December 7 every year, and in this period, you can change your Medicare Part D plan (drug plan) or Medicare Advantage plan (Part C). Also, educate yourself about the Inflation Reduction Act, which is projected to help seniors with rising drug costs by establishing a cap for out-of-pocket expenses and enforcing a $35 cap for a month’s supply of insulin. You may wish to consult a financial professional to help ensure that you have the coverage you need while choosing a plan that works best for your budget.

2 Assess your miscellaneous expenses—With inflation running high, the purchasing power from most Americans’ paychecks is decreasing, creating a mismatch that warrants a close look at your spending habits. Assessing recurring monthly expenditures, such as streaming or magazine subscriptions, and culling extra costs can be helpful in the long run.

3 Use your retirement funds wisely—Withdrawals from a 401(k) account or other qualified retirement plans won’t affect your monthly SS benefits. Similarly, pension payments, annuities, and dividends from retirement savings aren’t classified as earnings for SS purposes. If you have a Roth IRA account, withdrawals to help meet living expenses or unanticipated costs can potentially be made free of taxes after age 59½ and therefore are not likely to affect your SS benefits.

Consider consulting a financial professional

It’s important to learn how personal circumstances, COLAs, and your financial planning affect your monthly paycheck. We offer a wide range of resources on wealth planning, including presentations on understanding Social Security and optimizing your Medicare benefits. 

Before making any decision regarding your SS contributions or retirement plans, you may also wish to meet with your financial professional, who can help you better understand all of your options.