Beginning in January of 2023, approximately 70 million Americans on Social Security will see a historic 8.7% increase in their payable benefits, thanks to a cost-of-living adjustment (COLA). While the increase amounts to an average budget boost of $140 per month, it may not add up to extra spending power for many retirees. Here are the specifics you need to know.
The 8.7% Social Security cost of living adjustment will automatically kick in for all eligible recipients in 2023. This includes Americans who receive Social Security payments in 2022, as well as those who start drawing it in the new year. However, the amount you will actually receive depends on certain factors.
It’s anticipated that retired couples will realize an average $238 a month increase in their payments when the new COLA takes effect. The average increase drops to $146 for a single retiree, while widowed parents with two children could receive as much as a $282 jump in their monthly payment.[i]
While the cost of living increase expected for 2023 is the largest in 40 years, the COLA is not a new phenomenon. In fact, Social Security regularly adjusts to cover annual increases in the costs of necessary goods and services.
The Social Security Administration (SSA) uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to determine cost of living adjustments. In short, the CPI-W measures the average monthly change in the costs of goods and services, based on the spending patterns of wage earners.
The SSA then uses this information to determine how much the cost of living has risen and to set the COLA rate for a given year. What’s important to note is that the COLA doesn’t always go up. In some years, it has remained flat. This happened in 2010 and 2011 when the economy was in a deep recession.
Simply put, this means you might not see such a historic adjustment to your Social Security in the future, but the current COLA rate remains in effect, even if the cost of living goes down.
You should also know that you will earn the 8.7% COLA even if you opt out of receiving retirement benefits next year, as long as you have reached the minimum age of 62. That’s because your Social Security benefits will continue to adjust by each cost-of-living increase as long as you are at or above retirement age.
With inflation up more than 8% year over year as of September 2022, you may be wondering just how far your adjusted Social Security earnings will go in 2023. While that depends largely on your individual situation and spending habits, and where inflation takes us in the new year, there are a few things to note.
First is the fact that the cost of Medicare Part B premiums will decline in 2023 by 3%. That works out to a $5.20 decrease in your monthly premium. Annual deductibles will also go down $7. The decreases in Medicare premiums and deductibles could help to stretch the COLA a little farther.
While some economists predict that the adjustments to Social Security and Medicare benefits could add a boost to seniors’ wallets as well as the economy, you may not feel the immediate impact. The current cost of living adjustment was based on economic factors from the third quarter of 2021, before inflation hit its current peak.
That means the COLA will lag real-time inflation conditions by 15 months. If you’ve been feeling the pinch of rising costs during 2022, it may take some time to see a recovery in 2023.
The COLA could also increase the amount of taxes you pay on your Social Security earnings. For example, spouses filing jointly pay taxes on 50% of their benefits when they draw between $32,000 and $44,000 a year in income. If the COLA should increase their income above the $44,000 threshold, they’ll be required to pay taxes on 85% of their benefits, which could equate to a net drain rather than a net increase.
All in all, the COLA should help many retired Americans better afford the rising cost of living, but how it will impact you depends on your circumstances. If you have questions or concerns, be sure to speak with your banker or wealth management professional.
The articles in this blog are for informational purposes only and not intended to provide specific advice or recommendations. When making decisions about your financial situation, consult a financial professional for advice. Articles are not regularly updated, and information may become outdated.