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Amid record-high inflation, Social Security recipients will increase their benefits by 8.7% in 2023, the highest increase in 40 years.
The Social Security Administration announced the change on Thursday. This results in an average increase in performance of more than $140 per month as of January.
The average Social Security retirement benefit will increase by $146 per month from $1,681 in 2022 to $1,827 in 2023.
The Senior Citizens League, a non-partisan senior citizens’ group, had estimated last month COLA could be 8.7% next year.
The confirmed 8.7% increase in benefits beats the 5.9% increase seen by beneficiaries in 2022, which was then the highest in four decades.
The last time the cost of living adjustment was larger was in 1981, when the increase was 11.2%.
“This is a really exceptionally good news day for older Americans because their COLA is going up, their [Medicare] premiums will go down, and that means a lot more money in everyone’s pocket each month,” said Cristina Martin Firvida, AARP’s vice president of government affairs.
Next year’s record surge comes as beneficiaries struggled with rising prices that year.
“The COLAs are really about people treading water; they are not benefit increases,” said Dan Adcock, director of government relations and policy at the National Committee to Preserve Social Security and Medicare.
“They’re more trying to provide inflation protection so people can maintain their standard of living,” Adcock said.
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How much your social security check can be
Beneficiaries can expect to see COLA 2023 in their benefit checks starting in January.
But starting in December, you may be able to see notices online from the SSA detailing how big your checks will be next year.
Two factors — Medicare Part B premiums and taxes — can affect the size of your benefit checks.
The standard Medicare Part B premium will be $5.20 lower next year – from $170.10 to $164.90. These payments are often deducted directly from Social Security benefits.
“That means the beneficiaries will be able to keep pretty much all or most of their COLA increase,” Mary Johnson, a Social Security and Medicare analyst at the Senior Citizens League, told CNBC.com this week.
This may vary if you have money withheld from your monthly tax checks.
To estimate how much more money you’ll see in the next year, take your net Social Security benefit and add your Medicare premium and multiply that by the 2023 COLA.
“That will give you a good idea of what your raise will be,” said Joe Elsasser, a board-certified financial planner from Omaha, Nebraska, and founder and president of Covisum, a provider of Social Security application software.
How the COLA is linked to inflation
The COLA applies to approximately 70 million recipients of Social Security and Supplemental Insurance income.
The change is based on the consumer price index for city wage earners and office workers, or CPI-W.
The SSA calculates the annual COLA by measuring the change in CPI-W from the third quarter of the previous year to the third quarter of the current year.
Benefits do not necessarily increase every year. While there was a record 5.8% increase in 2009, the following two years had a 0% increase.
“For seniors, these years have been difficult because they are spending so much on health care,” Adcock said.
A similar pattern could emerge if the economy slips into a recession, Johnson said.
What the COLA means if you have not yet applied for benefits
If you choose to claim Social Security benefits, you’ll gain access to record-high COLA.
But you also have access to it if you wait to start your performance reviews at a later date, Elsasser said.
If you are now 62 and do not claim, each COLA will adjust your benefit until you do.
The level of COLA really shouldn’t affect take-up.
CFP and President of Covisum
In addition, late payments can increase the size of your monthly checks. Experts generally recommend that most people wait as long as possible, until age 70, as benefits increase by 8% per year from your full retirement age, typically 66 or 67, until age 70. Whether this strategy is ideal can vary depending on other factors, such as your personal health situation and marital status.
“The level of COLA really shouldn’t affect take-up,” Elsasser said. “It won’t hurt you or help you if you claim it because you’re going to get it either way.”
How a record hike may affect Social Security funds
Social Security trust funds can pay full benefits through 2035, the Social Security Board of Trustees said in June.
By that time, the program will be able to pay 80% of its benefits, the board predicts.
The historically high COLA in 2023 could accelerate the depletion of trust funds to at least a calendar year earlier, according to the Committee on Responsible Federal Budgeting.
Higher wages can encourage workers to contribute more payroll taxes to the program, which can help offset this. In 2023, the maximum taxable income will increase to $160,200, up from $147,000 this year.
Social Security trustees forecast a cost-of-living report of 3.8% in an annual report released in June.
“The overall cost of the program will be about 5% higher than expected for next year,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center, of the 8.7% cost-of-living adjustment in 2023.
Because other factors such as wage increases, immigration and mortality will also affect the program’s funds, it’s difficult to estimate how much the 2023 increase could shift projected exhaustion dates, he said.
What could happen with future power increases?
While 2023 marks a record COLA high, beneficiaries should be prepared for future years when increases are not as high.
As inflation subsides, so does the size of COLAs.
Whether the CPI-W is the best measure of annual increases is up for debate. Some tout the Consumer Price Index for the Elderly, or CPI-E, as a better measure of the costs seniors pay. Several bills in the Democratic Congress called for a change in the metric used to calculate annual increases in CPI-E. Others have suggested another measure, the Chained CPI, to rein in federal spending.