With one month of consumer price data left to go before a final determination, it appears near certain that the Social Security cost-of-living adjustment (COLA) for 2023 will be the highest in more than four decades.
Based on new CPI-W data through August, estimates by The Senior Citizens League show that the Social Security COLA for 2023 will be 8.7%. This is even after the CPI-W decreased for the second straight month in August. In comparison, based on CPI data through July, the organization estimated that the COLA for 2023 would be 9.6%.
The CPI-W stands for the Consumer Price Index for Urban Wage Earners and Clerical Workers, and it is used to calculate the annual Social Security COLA.
A COLA of 8.7% would increase the average retiree benefit of $1,656 by $144.10 (rounded as done by SSA), according to The Senior Citizens League. A COLA of 8.7% is “extremely rare and would be the highest ever received by most Social Security beneficiaries alive today,” explains Mary Johnson, Social Security and Medicare policy analyst with The Senior Citizens League, who conducts the estimates.
There were only three other times since the start of automatic adjustments that it was higher—9.9% in 1979, 14.3% in 1980 and 11.2% in 1981. The next highest after those three years was in 1982, when it was 7.4%.
The Social Security Administration is expected to announce the COLA on Oct. 13, 2022, after the release of the September consumer price index data, the organization further notes.
As to the importance of COLAs, the organization explains that they are intended to help maintain the buying power of Social Security benefits when prices rise. What’s more, they are a permanent increase that will gradually boost the total Social Security income that individuals will receive over the course of their retirement. “Without a COLA that adequately keeps pace with inflation, Social Security benefits purchase less and less over time, and that can create hardships especially as older Americans live longer lives in retirement,” emphasizes Johnson.
The SSA’s annual COLA announcement for the upcoming year also provides an early snapshot of what can be expected for COLAs on retirement plan contribution and benefit limits.
Tax Surprise?
COLAs also affect income, however. As such, higher income often leads to cuts in income related benefits for low-income people and higher taxes for those with incomes above $25,000 for individuals and $32,000 for married couples.
Thus, many thousands of retirees who have not previously paid taxes on their benefits in the past may discover they must start doing so. According to early results from The Senior Citizens League’s 2022 Retirement Survey, nearly 6 in 10 (59%) survey participants believe they could be at risk of higher tax liability for 2022 due to the 5.9% COLA received this year.
In addition, 21% of survey participants say that until 2022, their household income was below the income thresholds that can make up to 85% of Social Security benefits subject to federal income taxes. “That group worries they will pay tax on a portion of their Social Security benefits for the first time in the coming tax season,” notes Johnson.
A COLA of 8.7% would present similar ongoing increased tax liabilities for next year.
All-Items Index
As to the overall inflation numbers, the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.1% in August on a seasonally adjusted basis after being unchanged in July, the Bureau of Labor Statistics reported. Over the last 12 months, the all-items index increased 8.3% before seasonal adjustment.
Increases in the shelter, food and medical care indexes were the largest of many contributors to the broad-based monthly all-items increase. These increases were mostly offset by a 10.6% decline in the gasoline index, the BLS further noted.
Meanwhile, Medicare Part B premiums, which typically are announced in mid-November, may not grow by much in 2023. The Senior Citizens League notes that the Medicare Trustees forecast in their 2022 annual report that the standard Part B premium in 2023 would stay the same as it is now at $170.10. In addition, the Centers for Medicare and Medicaid Services (CMS) recently said that, due to a reassessment of the premium, excess Part B premium charges in 2022 would be used to reduce the Part B premium in 2023.
