Higher consumer prices this year will likely translate into record increases to the contribution limits federal regulators place on workplace retirement plans next year.
Asset management firm Mercer LLC projects a nearly 10% hike in the maximum annual limit workers enrolled in 401(k), 403(b), and many 457 plans can make in 2023.
The IRS currently places a $20,500 cap on annual employee deferral limits, but Mercer Law and Policy analysts said those figures could increase to $22,500. A 5% jump in contribution limits in 2020 was the second highest increase in US history.
A rise in contribution rates usually signals a loss in future purchasing power and can spell bad news for new retirees or US workers nearing retirement age. The lingering effects of the Covid-19 pandemic on the American supply chain, combined with the short-term effects of armed conflict in eastern Europe, are only expected to make it harder for retirees to stretch out a career’s worth of savings.
Inflation is expected to drive the average consumer price index to its highest levels since indexing began, according to The Senior Citizens League. That could impact other sources of post-employment income.
Social Security cost-of-living adjustments could be as high as 10.5% next year, Mary Johnson, a Social Security policy analyst for The Senior Citizens League who researches the effects of prices on retirement spending, said in a recent release.
Rising prices have already eliminated 40% of the buying power Social Security benefits earned two decades ago, “the deepest loss in buying power” since the organization began tracking prices, Johnson said.
“To put it in context, for every $100 of goods or services that retirees bought in 2000, today they would only be able to buy $60 worth,” she added.
Retirement plan contribution limits reflect cost-of-living adjustments through September, meaning the IRS still lacks three months of data. The agency usually announces official limits in late October or early November.