Blank Social Security checks are run through a printer at the U.S. Treasury printing facility in Philadelphia.
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The Social Security Administration on Thursday morning announced the highest cost-of-living adjustment (COLA) to benefits since the early 1980s: 8.7%. The reveal comes as inflation has risen to levels not seen in four decades.
The annual raise is designed to help preserve the purchasing power of the roughly 66 million Social Security recipients, including 51 million collecting retirement benefits, and will be applied to benefits beginning next January.
That adjustment will raise the average Social Security retirement benefit of $1,656 by $144.10, said Mary Johnson, Social Security and Medicare policy analyst at the Senior Citizens League, who accurately predicted the COLA. While it’s the biggest raise in more than a generation, the skyrocketing cost of food, rent and other essentials means it won’t go that far for most retirees.
Below, Barron’s answers common reader questions about the COLA:
I thought the 2023 COLA was going to be in the double digits. What gives?
The COLA is based on a calculation that compares the average consumer-price index from the third quarter of 2022 with data from the same period last year. The index that’s used in the calculation is the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.
High CPI-W readings over the summer led to an earlier COLA estimate of 10.5%. Johnson calculated that estimate based on the most current consumer-price data available at the time. Gas prices have since fallen, leading to the lower COLA, Johnson said.
How will this historic COLA affect Social Security’s long-term finances?
Social Security faces serious financial challenges. The program’s trustees project that the Old-Age and Survivors Insurance Trust Fund will run out of money in 2034, after which payroll taxes will continue to fund 77% of benefits. Many of the program’s woes stem from demographics: there are fewer workers supporting more beneficiaries than ever before.
Every year, the trustees publish a report on the state of the program, and it’s possible that the 2023 edition will show a projected acceleration of the depletion date by a year or two due to the high COLA, said Kathleen Romig, director of Social Security and Disability Policy at the Center on Budget and Policy Priorities.
That said, the program’s challenges are much larger than an outsize COLA, Romig noted. “It really shouldn’t make a big difference in the program’s long-term outlook,” she said. If inflation were to persist at very high levels for years, then it might have more of an impact, she added.
Should I claim Social Security earlier than planned to take advantage of this COLA?
In a word, no. If you are 62 and over, you will benefit from this COLA regardless of whether you have claimed your benefits or not. That’s because, starting the year you turn 62, the COLA is applied to your Primary Insurance Amount (PIA), the amount you would receive if you claim at your full retirement age, which is 67 for those born in 1960 or later. “It doesn’t matter if you’re collecting—you still get it applied,” said Martha Shedden, president and co-founder of the National Association of Registered Social Security Analysts.
If you claim before your full retirement age, your benefits will be reduced, but they’ll be reduced off a higher base thanks to the COLA. If you claim beyond full retirement age, your benefits will be boosted off their higher base by delayed retirement credits. “It’s still good to wait,” Shedden said.
How will this COLA affect my taxes?
This COLA will increase retirees’ income, potentially making some or more of it subject to federal income taxes. If you file as an individual and your combined income is between $25,000 and $34,000, up to half of your benefits may be subject to income taxes. If your income is more than $34,000, then up to 85% of your benefits may be taxable.
For couples filing jointly, if your combined income is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits, and if your income is more than $44,000, up to 85% of your benefits may be taxable.
Social Security defines combined income in a specific way for this calculation: it’s your adjusted gross income, plus nontaxable interest, plus one half of your Social Security benefits.
The IRS is expected to announce the 2023 standard deduction later this year, along with the inflation-adjusted dollar thresholds for each federal income tax bracket. These higher numbers could help lower beneficiaries’ taxable income and for some, offset the impact of the higher COLA from a tax perspective, said Johnson of the Senior Citizens League.
How will this COLA affect my Medicare premiums?
The COLA could push some higher earners into the bracket where they have to pay income-adjusted Medicare premiums in the future. For 2023, individuals whose 2021 income exceeded $97,000 and couples whose income exceeded $194,000 have to pay more than the standard Part B premium of $164.90 a month per person. Higher earners also pay more for Part D drug plans. The government bases the Medicare income-related monthly adjustment amount (IRMAA) on income from two years prior, so next year’s COLA could affect higher income beneficiaries’ premiums for 2025.
There is some good news for Medicare beneficiaries for next year: the standard Part B monthly premium will decrease by $5.20 for 2023. Most recipients get their Part B premium automatically deducted from their Social Security checks, so they will benefit from the full COLA next year—unlike last year, when a larger-than-average Part B increase of 14.5% took a big bite out of the cost-of-living adjustment.
Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com
Source: finance.yahoo.com