Social Security COLA Set At 8.7% For Fiscal 2023

The Social Security Administration announced last week that it will raise the cost-of-living-adjustment (COLA) at 8.7% for fiscal year 2023. This means monthly Social Security checks will be going up significantly immediately.

The Social Security COLA is largely based on changes in the Consumer Price Index, which peaked at 9.1% (annual rate) earlier this year. The CPI has since retreated to 8.2% in September. The latest reading of 8.2% in the CPI, which was released last Thursday, allowed the Social Security Administration to raise the COLA for fiscal 2023 by 8.7% — the largest increase in 41 years.

The latest adjustment will increase the average monthly retiree benefit from its current level of $1,656 by roughly $140. It remains to be seen if this increase will be enough to cover the rise in inflation in the next year. For 2022, the COLA was increased by 5.9% but inflation rose by 7.5% in calendar 2021.

The Social Security Administration (SSA) 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 was able to set the final COLA.

According to the Senior Citizens League (SCL), a non-profit organization dedicated to protecting seniors’ rights and benefits, there have been only three other occasions when the COLA increased by 8.7% or more, and that was in the hyperinflation years between 1979 and 1981.

The SCL cautions: “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. It’s too early to say how well the [latest] COLA will keep pace with inflation in 2023.”

While the large COLA increase of 8.7% is good news for many seniors, it may adversely affect the taxes others owe, especially higher income older people. I’ll come back to this in a moment.

Besides the large COLA increase, the other good news for seniors is the fact that the Medicare Part B premium is going down in 2023. Not by much, but for those on a fixed income, every little bit helps. This will happen at the same time that the sizable 8.7% 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.

Also, the annual deductible for Part B will decrease from $233 in 2022 to $226 in 2023. This will mean most beneficiaries will see more money after deduction for Medicare premiums.

This premium surprise affects both those with the highest incomes, as well as those with the lowest, but in different ways, according to the SCL.

Those who receive low-income assistance for health care costs can be subject to reductions in the amount of assistance they receive through Medicare Savings programs or Medicare Extra Help or Medicaid.

Increased incomes due the COLA can make some older and disabled beneficiaries ineligible for the level of benefits they currently receive when their income exceeds the limits.

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

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.  As such, rising tax brackets and the standard deduction could potentially offset much of the benefits taxation increase caused by higher income in 2022, according to analysts at the SCL.

Finally, there’s one other consideration: higher benefits could move the Social Security insolvency date forward. The SCL and others caution that the increase in Social Security income provided by the 2023 COLAs would permanently lift anticipated lifetime Social Security benefits. But this also means Social Security will likely become insolvent even sooner.

“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. That could mean Social Security could become insolvent earlier than previously forecast,” warns the SCL.

Hate to end on a down note, but I’ll leave it there for today.