Social Security bump is welcome news for retirees fighting inflation

Social Security benefits will increase 8.7% in 2023, helping retirees weather surging inflation that shows few signs of slowing down. 

It's the biggest cost-of-living increase since 1981, when there was an 11.3% bump in monthly benefits. On average, Social Security checks will rise by more than $140 a month starting in January. Roughly 70 million Americans, or about 25% of the US population, are Social Security beneficiaries.

The news about next year's cost of living adjustment (COLA) follows the Sept. 27 announcement from the Centers for Medicare & Medicaid Services that the standard Part B Medicare premium, which covers outpatient care, will fall by 3.1% to $164.90 in 2023. Last year, the premium rose 14.5%, well over the 5.9% cost-of-living increase in Social Security benefits. 

Read more: In the face of a recession, business owners avoid cutting salaries and benefits

"This may be the only time in our retirements that we get to see a COLA this high and the Medicare Part B premium going down," said Mary Johnson, Social Security and Medicare policy analyst for the bipartisan Senior Citizens League. "I'm encouraging everyone to appreciate it — this may be as good as it gets." 

Every year, the monthly Social Security benefit amount is tweaked to reflect changes in inflation as reflected in the Consumer Price Index for Wage Earners and Clerical Workers, a measure called the CPI-W. (The Consumer Price Index for Urban Consumers, or CPI-U, is the more commonly used measure.) The change is based on average inflation figures for the third quarter of the year, compared to the average for the same period a year ago.

Many older Americans have seen their portfolios and income stream take a one-two punch from drops in both their stock and bond holdings, and they're suffering from the highest inflation in four decades. Even in better economic times, Americans already faced a serious retirement savings shortfall. 

Often out of necessity, many retirees claim Social Security before they've reached the age when they would receive full benefits, which is 66 or 67, depending on their year of birth. That reduces their lifetime benefits — someone whose full retirement age is 67 but who claims benefits at age 62, for example, receives 30% less. Waiting until age 70 to claim gets a retiree the biggest benefit, since benefits increase by 8% for every year someone can wait from full retirement age to age 70.

Read more: No, seniors won't lose their Social Security if they 'unretire'

Social Security was cited as "a major source of income" by about 70% of retirees in a recent survey by the Employee Benefit Research Institute. Among retirees who said they'd cut either essential or discretionary spending post-pandemic, about 90% said it was out of concern about inflation.

Workers are also saving less, according to a July study from Charles Schwab of 1,000 401(k) participants. The study found 45% of plan participants citing inflation as "the main obstacle to saving for a comfortable retirement." Fifteen percent of plan participants said inflation had lead them to reduce contributions to 401(k)s.