What You Should Know About Social Security COLAs

The Motley Fool: When asked about the 8.7% cost-of-living adjustment for Social Security benefits in 2023, 55% of respondents in a recent Motley Fool survey said they didn’t think it was enough. Why do you think retirees feel this way when it's one of the biggest COLAs in history? Did the SSA make a mistake in not raising it more? Are Social Security COLAs fair annual increases in your opinion?

Geoffrey Sanzenbacher: “The SSA COLA Adjustment is based on the CPI-W for urban wage earners and clerical workers from the third quarter of the prior year to the third quarter of the current year. The COLA has always been based on this number, which is generally quite close to the more traditionally cited measure of inflation, the CPI-U (Consumer Price Index for all Urban Consumers). This year, the CPI-W used to adjust Social Security was actually higher than the CPI-U (which went up 8.3 percent over the same period). So, in this sense, the adjustment seems fair -- it more than accounted for the traditional measure of inflation. That being said, certain expenses increased more than both the CPI-U or CPI-W. Fuel is about 11 percent higher than it was a year ago. Food is similarly about 11 percent higher. So, to the extent that these prices loom large in seniors' minds and are a larger share of seniors' budgets, then it could make sense that there is some feeling of inequity. Of course, other goods -- like clothing -- have gone up less than the adjustment (about 5 percent). So, it seems on the whole fair to me, although I understand the perception.”

The Motley Fool: Because of the COVID-19 pandemic, many Americans now fear they won’t be able to retire. What is your advice for someone who may be worried about retiring because of recent financial setbacks?

Geoffrey Sanzenbacher: “I would give the same advice I generally give -- if at all possible, try to work a bit longer. This will not only give you more time to save, allow you to delay claiming Social Security (and increase your benefit by 7-8 percent forever), but it will also allow you to avoid pulling money out of the stock market before it fully recovers from its recent downturn. Right now, the labor market is still pretty tight, so working a bit longer is a reasonable option.”

The Motley Fool: In 2019, the average retirement account savings for American households was $65,000 with the average American under 35 having $13,000 saved for retirement. Why do you think this average is so much lower than what experts typically expect Americans to have?

Geoffrey Sanzenbacher: “The biggest reason the typical American has little in their account is because our 401k system does not have universal coverage. Leakages (early withdrawals) and fees play a smaller role. Expanding programs like state-run Auto-IRAs is one way to fix this issue, but a federal program would likely work much better.”

The Motley Fool: There are no hard and fast rules about when to retire or how much we should have saved, but what three pieces of advice would you give someone who is just starting their first retirement savings account?

Geoffrey Sanzenbacher: “Three simple pieces of advice: 1) make sure you get your entire employer match; 2) put your money into a S&P Index Fund that has a low expense ratio (something less than 0.25 percent of assets); and 3) don't look at it...ride out the lows and be happy you are buying cheap.”