Inflation has risen at a rapid pace in 2022 as the economy rebounds from the pandemic while adjusting to the ongoing Russian invasion of Ukraine.
Although millions of households across the country are experiencing the pain of higher prices right now, for Social Security beneficiaries that high inflation may also translate into another substantial increase in benefits.
Every year the Social Security Administration alters its monthly benefit payments using the annual Cost-Of-Living-Adjustment (COLA). Social Security benefits are one of the few types of incomes retirees receive that is adjusted for inflation.
The COLA increase is based on the data provided in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the year; July, August and September. The August data will be published on Tuesday, 13 September.
Last year the US Bureau of Labor Statistics released the Consumer Price Index data for September on 13 October and announced the COLA boost the same day. If the agency sticks to that timeframe this year, we can expect the 2023 COLA to be confirmed somewhere around Thursday, 13 October 2022. Some experts suggest that the COLA increase could be as much as 10.5%.
The Social Security Administration won't announce the exact #COLA for 2023 until October, but experts predict that benefits could increase by 8-10%. That would be the largest amount since 1981. //t.co/EED69wsy8i
— Megan Loe (she/her) (@meganaloe) August 22, 2022
“I think somewhere in the 9% range is probably a reasonable guess,” says Richard Johnson, director of the retirement policy program at the Urban Institute, a Washington, D.C.-based research organization.
“It’s hard to predict exactly how, in particular, energy prices are going to evolve over the next few months. I think that’s probably the big uncertainty.”
How is the COLA calculated?
The change in Social Security benefits, the COLA, is calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) published monthly by the US Bureau of Labor Statistics. The Social Security Administration uses the monthly average from the third quarter (July, August, and September) to compare to the same period the year before. For now it is difficult to know how high the boost will be, but experts do expect an increase on last year’s figure.
Last month David Certner, director of legislative policy for government affairs at AARP, explained that a large increase could be on the cards:
“It’s not possible to be precise until we see the data for the next two months, but it’s probably safe to say at this point we can expect a COLA in the 8 to 10 percent range.”
Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
This year’s sky-high inflation promises a giant raise for Social Security beneficiaries in 2023. The nonpartisan and nonprofit Senior Citizens League is currently forecasting a 8.7% cost-of-living adjustment (COLA) for next year.
Just be warned, a supersized COLA could lead to unwanted consequences, including higher taxes and Medicare costs.
What Is the 2023 Social Security COLA?
The annual Social Security cost-of-living adjustment is dictated by the consumer price index (CPI), which measures the rate of inflation in the U.S.
The 2023 COLA won’t be officially announced until October, but even if inflation falls a bit more, it’s still likely to be the biggest annual increase in Social Security benefits seen in years.
The Senior Citizens League believes that the 2023 COLA could be as high as 8.7%. That would be the largest increase since the 11.2% adjustment of 1981. If 8.7% turns out to be the magic number, here’s how Social Security benefits would change:
- The average monthly Social Security benefit would increase to $1,801 from $1,657. That’s an extra $1,730 for the full year.
- The average monthly benefit for a couple who both receive benefits would rise to $2,993 from $2,753—an additional $2,874 for the full year.
- The maximum benefit for a person claiming Social Security at what the program calls “full retirement age” (generally 66 or 67) would increase to $3,636 per month from $3,345. That’s an additional $3,492 for the full year.
Though the increases appear to be good news for older people hard hit by inflation, the numbers don’t factor in what Uncle Sam will take back in taxes.
How Is Social Security Taxed?
The same government that gives you Social Security benefits also taxes those benefits.
In 1983, Congress first levied federal income taxes on Social Security benefits. Under current law, you can owe tax on up to 85% of your benefits if you’re a single taxpayer with annual income over $25,000 or if you and your spouse file jointly and have combined income over $32,000.
Here’s are closer look at how Social Security benefits are taxed:
- For single taxpayers:
- Income of less than $25,000: 0% taxed
- Income of $25,000 to $34,000: Up to 50% taxed
- Income of more than $34,000: Up to 85% taxed
- For spouses filing jointly:
- Income of less than $32,000: 0% taxed
- Income of $32,000 to $44,000: Up to 50% taxed
- Income of more than $44,000: Up to 85% taxed
Let’s say you receive 2022’s average monthly Social Security benefit of $1,657 and get another $1,200 per month from your IRA, stocks or even a part-time job. You’d have a total income for the year of $34,284.
With an income over $34,000, you would be required to pay taxes on 85% of your annual Social Security benefits of $19,884, or $16,901 worth of your benefits. In effect, your taxable income would increase by that amount, and you could find yourself pushed into a higher tax bracket.
Most Beneficiaries Pay Taxes on Social Security
In the past, Social Security taxes were seen as a tax on the wealthy. Today the Social Security Administration estimates most beneficiaries—56%—pay taxes on their benefits. An 8.7% COLA would push that percentage even higher.
“This is a big concern because a few more years of high inflation and everybody is going to be paying taxes on 85% of their benefits,” says Larry Kotlikoff, a professor of economics at Boston University and the author of “Get What’s Yours,” a book about navigating Social Security. “This is a hidden benefit cut.”
Recipients also may pay increased state taxes in the states that tax Social Security: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont and West Virginia.
How the Social Security COLA Affects Medicare Costs
An 8.7% Social Security COLA for 2023 would result in some higher-income earners paying more for Medicare Part B (medical insurance) and Part D (prescription drug) benefits.
While the income-related monthly adjustment amount that’s used to determine Part B and Part D premiums is adjusted for inflation, a couple filing jointly and making just a few dollars over one of Medicare’s income thresholds can face huge premium increases.
“If you earn an extra dollar or receive an extra dollar or two of Social Security, your Medicare premiums can go up by $800, $900 or $1,000 [a month],” Kotlikoff says.
With a large Social Security COLA on the way, it’s time to explore what you’re likely to owe in taxes, says Mary Johnson, Social Security policy analyst for the Senior Citizens League.
Johnson urges all Social Security recipients to log into their My Social Security accounts, then discuss their income tax withholding with a knowledgeable financial advisor.
“If you know your taxable income is going to be 10% higher than the previous year, you are going to have to adjust estimated taxes,” Johnson says.
Low-Income Social Security Recipients May Be Hurt Most
Because of next year’s anticipated COLA spike, low-income beneficiaries may see cuts to their income-related benefits like Medicaid, the Supplemental Nutrition Assistance Program (SNAP, popularly known as “food stamps”) and the Medicare Savings Programs (MSP).
Eligibility for these programs is based on the federal poverty level. All of these programs are indexed for inflation, but couples who both get Social Security may receive an increase that throws them over the limit for SNAP or MSP.
These aren’t the only programs affected by an increase in the COLA. Payments to military retirees, disabled veterans, federal and state retirees are also tied to this increase.
Both Kotlikoff and Johnson urge Congress to fix how benefits are calculated.
Johnson also supports a temporary two-year suspension on the federal taxation of Social Security benefits. “Had these income thresholds been adjusted for inflation since 1984, the $25,000 level would today be about $68,400, and the $32,000 level would be $87,550,” Johnson says.
The Social Security Expansion Act, introduced in Congress June by Rep Peter DeFazio (D-OR) and Sen. Bernie Sanders (I-VT) suggests a number of ways to solve Social Security’s insolvency, including indexing taxation. But its chances of passage probably aren’t high because there’s little support in the Senate.
Does the Increase Mean You Should Take Social Security Now Rather Than Wait?
On the positive side, the annual COLAs are gifts that keep on giving. After a person reaches age 62, the increases are added automatically, regardless of when an older person starts taking their benefits.
Plus, the raises are cumulative. So if you receive an 8.7% increase in 2023, the next increase will be based on that total.
If you’re getting or are planning to take spousal, survivor or divorced spouse benefits, you’ll receive this increase and subsequent increases no matter when you sign up.
In other words, there’s no hurry to expedite the date when you take your benefits, Kotlikoff says.