If the price hikes shock you whenever you go to your local restaurant or the grocery store, you’re not alone. Consumers are experiencing the highest price increases in decades, leaving those approaching retirement questioning whether their income can keep up.
Fortunately, the Social Security Administration (SSA) offers cost-of-living adjustments (COLAs) that raise the monthly benefits of current beneficiaries. The SSA usually announces these adjustments in October; the most recent COLA for 2023 was published on October 13.
But will this adjustment affect you if you are still some years away from retirement? Well, this will depend on when you start filing for benefits.
Here is everything you need to know about Social Security COLA 2023 increase.
2023 Social Security Benefit Increase
On October 13, 2022, the SSA declared that there would be an 8.7% increase in payouts in 2023. This is the highest increase in the last 40 years.
Kilolo Kijakazi, the SSA Acting commissioner, stated that Medicare premiums will decrease while Social Security benefits will increase in 2023. This, in turn, will provide retirees with a better sense of security and breathing space.
Medicare premiums have not increased for more than ten years thanks to the sizable Social Security COLA this year. That means the SSA can afford more support to senior Americans who depend on their earned benefits.
What Is a Cost-of-Living Adjustment?
Cost-of-living adjustment (COLA) was created to ensure inflation does not reduce the buying power of Social Security and Supplemental Security Income (SSI).
The Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, is the main method used to calculate inflation.
To determine the amount of the COLA, the SSA looks at the CPI-W’s increase from the previous year’s third quarter to the current year’s third quarter.
So, if there’s no increase, there won’t be any COLA – something that can happen after an economic recession. But in years when prices are skyrocketing, the adjustment can be substantial.
In 2022, for example, the SSA imposed a 5.9% COLA due to the increase in the CPI-W between the third quarter of 2020 and the same quarter in 2021. Unsurprisingly, COLA is much greater in 2023, considering the rapid price increases in 2022.
How Does the COLA Affect Benefits?
The COLA is applied to the primary insurance amount (PIA), which beneficiaries are entitled to once they begin receiving benefits after retirement age. Let’s say that in 2021 your PIA was $1,800 per month. Your benefit would increase to $1,906.20 after the 5.9% adjustment.
Retirees are just some of the people who qualify for Social Security COLA based on their income history. Annual increments apply to beneficiaries of survivor, spousal, and disability benefits.
If you are a current recipient, you should know that your current PIA and the amount you get may not match. Your monthly payout can be lower if you begin receiving benefits earlier.
Delaying benefits until you reach full retirement age might result in higher benefits (but increases in monthly benefits stop at age 70).
Additionally, some seniors have their Medicare payments withdrawn automatically from their Social Security benefits. As a result, the modification to your monthly payment may differ from the COLA.
How Does Social Security COLA Affect Future Retirees?
Will Social Security COLA 2023 increase affect the benefit amount of future beneficiaries? This will depend on when they apply for Social Security. It is crucial first to comprehend how the SSA determines retirement benefits and how it operates fully.
Generally, Social Security benefit is based on your average indexed monthly earnings (AIME). Your AIME is calculated by taking your earnings for every year worked and adjusting the earlier years of your career to make them more comparable to the years after you turned 60.
After this, it divides the total by the 12 months of the year, averaging the 35 years with the greatest index profits. Your AIME is the tally that results. The administration uses your first year of eligibility to calculate your PIA, which is then applied to the AIME.
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So, you will only be eligible for COLA increases if you apply for retirement benefits after age 62.
You get adjustments expressly for every year between the time you first became eligible (at age 62) and the filing date. There’s a chance you won’t get any adjustments if you apply for Social Security at once after turning 62.
Suppose you will apply for Social Security in 2023 when you attain your full retirement age, which is 66 years and four months. You might get any COLAs you had missed since 2019 when you turned 62 and were qualified for benefits.
In light of this, you could be eligible for increases of 1.6% from 2019 to 2020, 1.3% from 2020 to 2021, 5.9% from 2021 to 2023, and 8.7% from 2023 to 2023.
Inflation is indirectly factored into your Social Security income even if you don’t get any past COLA adjustments. To compute a PIA, the program indexes salaries, which raises the benefit calculation to account for lower-earning years.
The SSA reports that new beneficiaries often get more monthly payments than current beneficiaries.
The Impact of COLAs on Taxes
COLAs help Social Security claimants withstand the effect of rising prices, particularly when inflation is high. However, only some prospective recipients will get a net income increase equal to the COLA amount.
That’s because having more income can place a person in a higher tax bracket and increase their overall tax burden.
The IRS determines the tax status of your Social Security payments using your “combined income.” This is calculated as your adjusted gross income plus nontaxable interest plus 50 percent of your Social Security benefit.
You might only have to pay tax on their monthly payment if you earn a little money from employment or investments. But when your income reaches a particular level, it changes.
For example, if you are unmarried and your combined income ranges from 25,000 to $34,000, about 50% of your benefit may be subject to income tax. Additionally, up to 85% of your earnings are taxed if your combined income exceeds $34,000.
If you are married, around 50% of your benefits will be taxed if your combined income ranges between $32,000 and $44,000. If your income exceeds that, about 85% of your Social Security benefit may be subject to taxation.
For individuals who delay benefits until beyond age 62, earlier COLAs may result in a rise in tax liabilities, so it’s crucial to make the necessary preparations.
To avoid unpleasant surprises during tax filing season, you can ask the Social Security Administration (SSA) to deduct federal taxes from your monthly payment when you file for benefits. A financial advisor you work with can offer you individualized advice for minimizing the effect on your finances.
Planning for Inflation
The fact that Social Security offers COLAs ensures your payment from inflation if you are approaching retirement.
The program is just one of several income options for most older Americans. Therefore, it’s crucial that you consider the purchasing power of other assets you could rely on.
An excellent time to assess your retirement spending plan and determine whether your financial portfolio can fund your desired lifestyle and personal objectives is now.
Using a retirement income planning calculator, which considers your age, assets, and projected spending is an easy way to see if you’re on track.
If you want to quit employment, a financial advisor should assess your portfolio to ensure that you have sufficient shares and inflation-protected assets to shield yourself from potential price hikes.