Social Security Increase 2023 - What You Need to Know
Social Security beneficiaries can expect a pay increase next year.
In 1973, Congress introduced cost-of-living adjustments, or COLAs, into law. With COLAs, those receiving Social Security benefits could see their retirement income adjusted each year to match the cost of living. These adjustments came into effect in 1975 and they've helped those receiving retirement benefits ever since.
Thanks to rising inflation (which could already be affecting your retirement), the cost of living has gone up. Experts expect the COLA for 2023 to have a nearly double-digit increase. Right now, estimates are at 9.6%
But what does that mean for those who plan to receive Social Security and Medicare in 2023?
How do they calculate COLA?
Social Security COLAs are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W helps us understand the way changes in prices might affect the workers listed: those who earn wages or perform clerical work. To find the COLA, experts compare the CPI-W of the third quarter of the current year with the CPI-W of the third quarter of the year the previous COLA took effect. If they find an increase, they announce a COLA for the following year.
6 things you need to know about COLA 2023
We've watched inflation rise this year and, with it, the cost of living. As we enter the third quarter of the year, it's natural for many to speculate what the COLA for 2023 might be. While the news speculates about what that could mean for those receiving Social Security next year, there are a few things you should know about the increase.
1. The increase happens automatically
There is absolutely nothing current Social Security beneficiaries must do to receive their COLA increase. Once the Social Security Administration puts it into place, it's official: your benefits increase that December. Because of the way benefits get paid, you should see the increase reflected in your checks the following January.
2. The biggest COLA in 40 years
This might be a shocking statistic for the Boomers, but the currently estimated COLA increase of 9.6% would be the biggest increase since 1981. That year, benefits went up by 11.2% to meet the cost of living. In fact, next year's COLA could be one of the biggest increases in history. If the estimate of 9.6% turns out to be true, it would be the 4th-biggest increase since the first COLA in 1975.
3. This year's COLA fell short
In January 2022, Social Security benefits increased by 5.9%. Unfortunately, that failed to meet cost-of-living increases this year. That's because of the rise in inflation which, at the moment, stands at about 8.5%. While next year's COLA could do much to help those who need it most, many might use it to recoup the savings they've used to make ends meet this year.
4. The total increase isn't set yet
Because the increase is based on the CPI-W for the entire third quarter, it's not yet set in stone. For that, we have to wait for the quarter to end on September 30th. The final decision on next year's COLA should be announced the following month. The current estimate of 9.6% could change between now and October. According to the Senior Citizens League, the COLA could range anywhere between 9.3% and 10.1%, depending on whether inflation rises or falls. Other agencies have released their own estimates, with some as high as 10.8%. But, until it's officially announced, we can't know for sure.
5. Your increase is based on your current income
It's important to remember that the COLA increase is a percentage. This means that Social Security benefits increase differently for every recipient. For the average Social Security recipient, a 9.6% COLA would increase their benefit checks by roughly $159 per month.
6. A new bill could offer expanded benefits
Senators Bernie Sanders and Elizabeth Warren, along with some of their colleagues, have introduced a bill to Congress that would expand Social Security benefits even further. If it wins approval, the bill would give Social Security recipients an additional $200 a month, or $2,400 a year—a welcome addition to those seniors who've seen annual cost-of-living increases fall short.
As written, the bill would also help Social Security remain solvent for at least the next 75 years, helping to guarantee retirement benefits for nearly a century.
Are there downsides to a COLA increase?
The benefits of a COLA increase seem obvious: retirees receive more money so they can continue to afford their retirement lifestyle. But increased Social Security benefits can come with a couple of disadvantages as well. To be clear, these disadvantages would most likely affect a minority of recipients whose income is currently on the cusp of an important benchmark. For instance, a Social Security increase could:
Bump recipients into higher tax brackets
Retirees with income at or below $24,999 have the additional benefit of not paying taxes on their Social Security. However, a 9.6% income increase could bump them into the next tax bracket. If they now earn between $25,000 and $34,000, they could pay up to 50% tax on their Social Security income. If their income gets bumped over the $34,000 mark, they could owe up to 85% in taxes on their Social Security.
Disqualify those who receive help based on need
Retirees who receive additional help based on financial need could suffer from an income increase. If their current income is just below the benchmark for receiving aid, a 9.6% bump might disqualify them from receiving that needs-based assistance, and may need to find new avenues to save money in retirement.
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