The cost-of-living adjustment for 2023 will be 8.7%, according to the Social Security Administration — the largest increase for Social Security benefits in more than four decades.
Social Security’s COLA hike can partly be attributed to high inflation, experts said. And while it’s a welcome result of inflation — which has caused many Americans to stress over their monthly bills — it may still not be enough to battle everyday expenses.
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“This may be the first and possibly the last time that beneficiaries today receive a COLA this high,” said according to Mary Johnson, an analyst who tracks COLA for the Senior Citizens League, a nonpartisan advocacy group for retirees.
On average, Social Security benefits will increase by more than $140 per month starting in January.
“The COLA is one of the most valuable feature of Social Security, helping seniors and people with disabilities keep up with expenses and ensuring they don’t fall into poverty as they age,” said Kathleen Romig, senior policy analyst at the Center for Budget and Policy Priorities. “The COLA is easy to take for granted in years with low inflation, but this year illustrates how vital it is.”
Almost seven-in-10 retirees rely on Social Security as their primary retirement income source, according to a Transamerica Center for Retirement Studies report.
But the amount of Social Security is not tied to the prices of goods and services typically used by older Americans. The COLA is instead linked to the consumer price index for urban workers, or CPI-W, which more heavily weighs costs for transportation, food, apparel, and other expenses you’d expect an urban non-retiree to spend on. There’s another consumer price index that targets elderly spending specifically, called the CPI-E, which focuses more on healthcare and housing and other goods and services a retiree uses.
Tying benefits to the consumer price index of urban workers, or CPI-W, worked out in retirees’ favors this and last year because of the higher uptick in inflation (take for example, how much more people were spending to fuel their cars this year) but usually, CPI-E outpaces CPI-W, according to an analysis from Social Security Intelligence, a blog run by Devin Carroll, a financial adviser and founder of Carroll Advisory Group. Legislators have pushed to switch Social Security’s COLA to follow CPI-E in proposals intended to expand and improve the program.
“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 this COLA will keep pace with inflation in 2023,” Johnson said.
The rate hike could have adverse effects for some individuals. For example, the higher COLA could increase some retirees’ tax returns in future years. Benefits are adjusted for inflation, but the benchmarks for Social Security beneficiaries’ tax liabilities if they’re earning income while receiving their benefit checks, haven’t been updated since 1984. When individuals go over those thresholds, they could be responsible to pay income tax on up to 50% — or at times, 85% — of their benefits.
Medicare Part B premiums might also be impacted. Most beneficiaries must pay a standard premium for this part of their insurance every month, but those with higher incomes pay more. In 2023, Medicare Part B premiums are decreasing about $5 a month, from $170.10 in 2022 to $164.90 in 2023.
“There are 65 million Social Security beneficiaries, most of whom rely on Social Security for most of their income. They face higher bills this year, and the COLA announcement is excellent news for them,” Romig said.