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Retirement Planning > Social Security

Social Security COLA for 2023 Set at 8.7%

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What You Need to Know

  • With the final inflation data published for the third quarter, the Social Security Administration can set the final 2023 cost-of-living adjustment.
  • A COLA adjustment of this magnitude is exceedingly rare, so retirees should enjoy it while they can, sources say.
  • Even with a significant COLA for 2023, it will likely be hard for retirees to keep up with inflation.

The consumer price index data for September, released Thursday, shows inflation ran at 8.2% over the past 12 months before a seasonal adjustment and was 0.4% from August to September on a seasonally adjusted basis.

Based on the new data through September, the Social Security Administration’s final cost-of-living adjustment for Social Security beneficiaries is 8.7%.

A COLA this large would be the biggest increase since 1981. The adjustment would increase the average monthly retiree benefit from its current level of $1,656 by roughly $140.

A Highly Anticipated Announcement

The Social Security Administration uses average inflation in the third quarter, based on the consumer price index for urban wage earners and clerical workers, to calculate the benefit adjustment for the following year. With September’s data now available, the SSA can set the final COLA.

Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League, says a COLA adjustment in this realm is rare, and she advises beneficiaries to “enjoy it now.”

“This may be the first and possibly the last time that beneficiaries today receive a COLA this high,” she told ThinkAdvisor in a statement. “There were only three other times since the start of automatic inflation adjustments that COLAs were higher, between 1979-1981.”

Near-Record COLA Increases Dented by High Inflation

“Without a COLA that adequately keeps pace with inflation, Social Security benefits purchase less over time, and that can create hardships especially as older Americans live longer lives in retirement,” Johnson says. “It’s too early to say how well the 8.2% COLA will keep pace with inflation in 2023.”

Johnson points out that the sizable 5.9% COLA received by Social Security beneficiaries during 2022 year has fallen short of the rate of inflation, despite being hailed as a meaningful increase in benefits.

Medicare Premium Cuts

Johnson says it is good news for Social Security recipients that the Medicare Part B premium is going down in 2023 at the same time that a sizable benefit increase will kick in.

Medicare Part B, which pays for doctor and hospital outpatient services, is automatically deducted from Social Security checks. The standard Part B premium in 2023 will be $164.90, a decrease of $5.20 per month, from $170.10 in 2022.

The annual deductible for Part B will also decrease from $233 in 2022 to $226 in 2023. This will mean that most beneficiaries will see more money after deduction for Medicare premiums, Johnson points out.

Higher Medicare Costs Down the Road

Johnson warns that rising Social Security income due to COLAs can affect Medicare costs down the road. This is because any increase in the income of a Medicare beneficiary — whether due to COLAs, earnings from jobs, retirement savings or pensions — could potentially affect what an individual pays in Medicare premiums if income is over certain thresholds.

“This premium surprise affects both those with the highest incomes, as well as those with the lowest, but, in different ways,” Johnson says.

Those who receive low-income assistance for health care costs can be subject to trims in the amount of assistance they receive through Medicare Savings programs or Medicare Extra Help, or Medicaid. Increased incomes due the COLA can make older and disabled beneficiaries ineligible for the level of benefits they currently receive when their income exceeds the limits, Johnson warns.

Higher income Medicare beneficiaries may pay more in Part B and Part D premiums if incomes are higher than $97,000 for individuals or $194,00 for couples filing jointly. A boost to income can push beneficiaries into higher premium brackets, Johnson says.

Tax Considerations

According to Johnson, unlike the rest of the tax code, the income thresholds that subject Social Security benefits to taxation have never been adjusted for inflation since the tax became effective in 1984. Thus, any increase in Social Security income due to COLAs could mean a higher portion of an individual’s Social Security benefits may be taxable.

On the other hand, tax brackets and certain key exemptions are regularly adjusted for inflation, and tax experts expect these to rise by a historically high amount next year, Johnson says. As such, rising tax brackets and the standard deduction could potentially offset much of the benefits taxation increase caused by higher income in 2022.

One other consideration, Johnson says, is that higher benefits could move the Social Security insolvency date forward. She notes that the increase in Social Security income provided by the 2023 COLAs would permanently lift anticipated lifetime Social Security benefits.

“While that’s great news for Social Security recipients in the short term, it also means that total benefit costs in future years will be significantly higher than previously anticipated,” she says. “That could mean Social Security could become insolvent earlier than previously forecast.”

More on September’s Inflation Numbers

The gasoline index fell 4.9% in September after a 10.6% decline in August.

The food index rose 0.8% for the month after increasing 0.8% in August. The food at home index rose 0.7% in September, the BLS data shows. The food away from home index also increased 0.9% in September.

The index for all items excluding food and energy rose 0.6% in September, equal to the rate seen in August, the BLS reported.

For the 12 months ended in September, inflation on items excluding food and energy increased 6.6%, a slightly higher increase than the 6.3% logged for the year ending in August.

The BLS stated that over the past 12 months the energy index rose 19.8%, a smaller increase than the 23.8% rise for the year ended in August. The food index gained 11.2% for the year ended in September, compared with 11.4% for the year ended in August.

The shelter index rose 0.7% in September, echoing the 0.7% measured in August. For the last 12 months, the shelter index increased 6.6%.


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