11 Things to Know About the 2023 Social Security COLA

For the vast majority of retirees, Social Security income is indispensable. According to pollster Gallup, just shy of 90% of surveyed retirees lean on their monthly payout as a “major” or “minor” source of income to make ends meet.

What’s more, the Center on Budget and Policy Priorities found that 16.5 million people aged 65 and over are pulled out of poverty every year thanks to the existence of Social Security. Instead of an estimated poverty rate of 38% for seniors if the program didn’t exist, Social Security has helped lower the poverty rate for aged Americans to 9%.

Image source: Getty Images.

In other words, Social Security is vital to the financial well-being of tens of millions of Americans, which is what makes the upcoming cost-of-living adjustment (COLA) announcement so important. Here are the 11 most important things you need to know about the 2023 Social Security COLA.

1. What is Social Security’s cost-of-living adjustment (COLA)?

The best way to think about Social Security’s COLA is as the mechanism that accounts for the rising price of goods and services (inflation). Since tens of millions of retirees count on Social Security during their golden years, payouts would, ideally, increase in lockstep with the prevailing inflation rate to ensure that seniors don’t lose purchasing power. COLA is the “raise” passed along most years to account for inflation.

Note, “raise” is in quotation marks to signify that this is a benefit increase passed along to match inflation, and not a raise like you’d get from an employer that could help you outpace the inflation rate.

2. The CPI-W is the program’s inflationary tether

Prior to 1975, Social Security’s cost-of-living adjustments were passed along without rhyme or reason by special sessions of Congress. All told, just 11 “raises” were doled out between 1940 and 1975.

Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been the program’s annual inflationary tether. The CPI-W has eight major spending categories and many dozen subcategories, all of which have their own respective percentage weightings. These weightings allow the CPI-W to be expressed as a single number, which makes for easy month-to-month and year-to-year comparisons to determine if inflation or deflation (falling prices) have taken place.

3. How COLA is calculated

Surprisingly, calculating Social Security’s cost-of-living adjustment is pretty easy. The average CPI-W reading from the third quarter (Q3) of the current year (July-September) is compared to the average CPI-W reading from Q3 of the previous year. If the current-year average CPI-W is higher, inflation has occurred and beneficiaries will receive a “raise” in the upcoming year.

The amount of the increase in benefits is simply the year-over-year percentage rise in the average CPI-W, rounded to the nearest tenth of a percent.

4. Here’s when the 2023 Social Security COLA will be announced

The all-important question: When will you know how much Social Security checks are rising in 2023?

The answer is Thursday, Oct. 13, 2022, at 08:30 a.m. EDT. That’s when the U.S. Bureau of Labor Statistics will release the September inflation data, which is the last puzzle piece needed to concretely calculate COLA for the upcoming year.

A sizable spike in the inflation rate will send Social Security checks soaring in 2023. U.S. Inflation Rate data by YCharts.

5. What’s the current estimate for next year’s “raise?”

Other than “when” COLA will be announced, the other important question among the program’s 65 million-plus beneficiaries is bound to be, “How much extra will I receive?”

According to Social Security policy analyst Mary Johnson of The Senior Citizens League (TSCL), a nonpartisan senior advocacy group, next year’s COLA is estimated to come in at 8.7%. The average retired worker — over 48 million beneficiaries are retired workers — would see their monthly check rise by $146 if Johnson’s forecast is accurate. Meanwhile, the average disabled worker and survivor would enjoy an extra $119/month and $116/month, respectively, in 2023.

6. Social Security checks will enjoy a historic boost next year

If you’re wondering where an 8.7% COLA would rank, historically, it’s pretty high on the list. Since the CPI-W became the annual inflationary measure for Social Security, an 8.7% COLA would represent the fourth largest percentage increase. Including the arbitrary COLAs passed along by special sessions of Congress, it’s the 12th-biggest percentage boost of all time.

However, when it comes to nominal-dollar “raises,” next year’s cost-of-living adjustment will be the largest on record, without question.

7. Certain states will see larger nominal-dollar increases than others

To be crystal clear, each of Social Security’s more than 65 million beneficiaries receives the same COLA. But because average retired worker payouts vary by state, certain states will see bigger nominal-dollar payout increases in 2023 than others.

Based on data made available in the annual Social Security Statistical Supplement, retirees in Connecticut, New Jersey, Delaware, New Hampshire, and Maryland are expected to receive the largest nominal-dollar “raise” to their Social Security checks in 2023. Since median household income is above average in these states, higher lifetime incomes should result in a bigger monthly Social Security payout during retirement.

8. Inflation could eat up a substantial amount of the upcoming COLA

Now for some not-so-pleasant news: You’ll probably be kissing a big portion of your 2023 COLA goodbye.

Since the annual cost-of-living adjustment is designed to mirror the prevailing inflation rate, as measured by the CPI-W, a historically high COLA means the cost of food, shelter, energy, and other expenses has risen significantly. It can take a considerable amount of time before inflation tapers. In other words, the rising cost of goods and services should eat up quite a bit of next year’s COLA.

Image source: Getty Images.

9. There’s also a silver lining for most retirees in 2023

However, there is a bit of rare good news for aged Americans who receive benefits from Social Security and Medicare.

Medicare Part B premiums have risen almost every year for the past quarter of a century. Part B is the segment of Medicare that covers outpatient services. But in 2023, the Part B premium is declining from $170.10/month to $164.90/month. Since Part B premiums are deducted from monthly Social Security benefits for most retirees, this year-over-year drop in Part B premiums suggests retirees will get to hang onto a bit more of their COLA in the upcoming year than usual.

10. Social Security dollars have been losing purchasing power for over two decades

More bad news: No matter how high the cost-of-living adjustment is in 2023, seniors are in no position to make up for a persistent loss of purchasing power since the beginning of the century. According to TSCL, the purchasing power of a Social Security dollar has fallen by a jaw-dropping 40% since 2000.

The reason for this loss of purchasing power is that the CPI-W is doing a poor job of accounting for the inflation seniors are contending with. As its full name implies, the CPI-W is designed to track the spending habits of “urban wage earners and clerical workers.” These are folks who typically aren’t receiving Social Security benefits and who spend their money very differently than aged Americans. As a result, key expenditures for the retirees who make up the bulk of Social Security’s recipients, such as medical care and shelter, are being underweighted.

11. Your tax liability may go up

Finally, Social Security’s historically high cost-of-living adjustment is liable to lead to increased federal tax liability for most retirees in 2023.

Whether you realize it or not, Social Security benefits are taxable above certain income thresholds. In 1983, the Reagan administration passed the last major overhaul of Social Security that, among other things, introduced the taxation of benefits. If a recipient’s modified adjusted gross income (MAGI) plus one-half of benefits surpasses $25,000 (or $32,000 for couples filing jointly), half of their benefits are subjected to federal taxation.

In 1993, the Clinton administration added a second tier of taxation that allows up to 85% of benefits to be taxed if the MAGI plus one-half benefits formula is above $34,000 for a single filer or $44,000 for a couple filing jointly. Since these income thresholds have never been adjusted for inflation, every annual COLA increases the likelihood of benefits being subjected to federal taxation.

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.

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Posts