Every October, the Social Security Administration announces how much of a cost-of-living adjustment (COLA) the program’s beneficiaries will receive for the following year. Those annual increases have topped 11% only twice since 1975, when automatic annual COLAs were first implemented.
The Committee for a Responsible Federal Budget, a nonprofit public policy organization, predicts that the COLA for 2023 will be huge — potentially as high as 10.8%. Even if that prediction is overly optimistic, the third-largest Social Security increase ever could realistically be on the way. But here are three reasons why retirees shouldn’t cheer just yet.
Social Security COLAs are intended to help seniors maintain their standard of living as prices rise due to inflation. However, their actual costs will probably increase by a greater percentage than the COLA — no matter what percentage that boost turns out to be.
The ugly secret for Social Security is that its COLAs don’t keep up with the real inflation rate for retirees. The Senior Citizens League conducted a study that found Social Security benefits have lost a whopping 40% of their buying power since 2000. During this period, COLA increases were given in all but three years.
One key reason for that erosion in buying power is the way COLAs are calculated. Social Security bases them on the changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Although the CPI-W measures inflation based on the prices of a large basket of goods and services, that basket does not include healthcare costs. Medicare Part B premiums soared 14.5% this year, more than even the highest estimate for the upcoming Social Security increase.
Speaking of higher Medicare premiums, some retirees may pay even more for them as a result of next year’s big Social Security increase. Both Medicare Part B and Part D premiums are based on annual income, so the COLA could push some Social Security recipients into a higher bracket.
The Medicare premium rates for 2023 haven’t been announced yet. Below are the income brackets for Medicare Part B and Part D that are effective this year based on annual income in 2020.
While the rates will be different for next year, it’s likely that the income brackets will remain the same. If you’re on the bubble of moving into a higher bracket, it’s possible that the next Social Security COLA will boost your Medicare premiums down the road.
There’s a pretty good chance that your income taxes will be higher as a result of the big COLA that’s on the way. Twelve states tax Social Security benefits at least in some cases — Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. You must pay federal taxes on your Social Security benefits if:
It’s also possible that the COLA could bump you into a higher tax bracket. In 2022, the marginal tax rates were:
Data source: Internal Revenue Service.
The bottom line is that the big Social Security increase that’s likely on the way might not be as great as it seems. But that’s the pessimistic perspective. For retirees who prefer to look at the glass as half-full instead of half-empty, the good news is that at least some relief is coming to help them compensate for soaring prices.
The $18,984 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $18,984 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.
Submit a tip or story idea // Report a typo or error