The 2023 Social Security cost of living adjustment (COLA) might not reach double-digits after all, but it’s still on track to be the largest COLA since 1981, according to a new estimate released this morning from The Senior Citizens League’s Mary Johnson.
“Based on new CPI-W data through July, it appears the COLA for 2023 will be 9.6%”
TSCL’s Mary Johnson
“Based on new CPI-W data through July, it appears the COLA for 2023 will be 9.6%,” said Johnson, TSCL’s Social Security and Medicare policy analyst. “If inflation runs ‘hot’ or higher than the recent average, the COLA could be 10.1%. If inflation runs ‘cold’ or lower than the recent average, the COLA could be 9.3%.”
Regardless where it ends up being within that range, it will be historically high. The highest ever was 1980’s 14.3% increase. This year’s 5.9% COLA increase was the biggest since 1982’s 7.4% increase.
It is important to note that Johnson’s updated estimate of 9.6% is nearly a one-point decline from her previous estimate of 10.5% made a month ago when higher June inflation numbers were released by the Bureau of Labor Statistics via the Consumer Price Index. While the CPI was up 9.1% year-over-year in June—a 40-year high—this morning’s updated figures for July show inflation is slowing. On a month-to-month basis, the July CPI reading was unchanged from June—meaning no price growth was registered. The June month-on-month increase was 1.3%. Over the last 12 months, the all-items index increased 8.5%.
Dropping gas prices are the biggest reason inflation is slowing. AAA reports average gas prices have dropped more than a dollar from an all-time high of $5.02 in June to $4.01 as of Wednesday, though gas prices are still up 44% from a year ago. The BLS report found gas prices fell 7.7% in July to offset increases in the food and shelter indexes, resulting in the all-items index being unchanged over the month.
Official 2023 COLA coming Oct. 13
The Social Security Administration will not determine the official 2023 COLA until inflation rates are also tracked in August and September, including the July numbers.
“There are only two months of consumer price data left to go,” Johnson said, adding that she expects the Social Security Administration to announce the official 2023 COLA on October 13, 2022, after the release of the September Consumer Price Index data.
She emphasized that a high COLA is needed by seniors to try to keep up with inflation.
“A high COLA will be eagerly anticipated to address an ongoing shortfall in benefits that Social Security beneficiaries are experiencing in 2022 as inflation runs higher than their 5.9% COLA,” Johnson said. “Based on inflation through July, we calculate that a $1,656 benefit is short about $58 per month on average and by a total of $373.80 year to date.”
If the 2023 COLA ends up at the estimated 9.6%, the average Social Security beneficiary would see their monthly payment increase by about $159 to $1,656.
COLA will trigger tax hike for some
While a large COLA is generally good news for seniors who rely on Social Security to help them keep pace with higher costs of living, it can present new challenges for some seniors in the form of higher incomes pushing them into a higher tax bracket—and in some instances triggering permanently higher taxes for many retirees because the income thresholds are not adjusted like ordinary tax brackets.
A bigger Social Security benefit translates to higher income, which can mean higher taxes for those with incomes above $25,000 for individuals and $32,000 for married couples.
In fact, due to 2022’s 5.9% COLA, The Senior Citizens League said tens of thousands of retirees who have not paid taxes on their benefits in the past may discover they must start doing so in 2023. And with a projected 2023 COLA of 9.6%, even more will have to begin paying taxes in 2024.
“Financial advisors will want to make sure their clients’ withholdings are set at the correct level for 2022 as well as anticipate adjustments for 2023,” TSCL’s Johnson told 401k Specialist recently. “The 5.9% COLA in 2022 will boost incomes, and clients may be withdrawing at higher rates if they are attempting to cope with inflation. This is a good time to contact clients and touch base for annual reviews and to tweak that distribution withholding.”
Johnson said advisors can also suggest that clients estimate their tax liability for Social Security income in 2022 if they have not done so already. A worksheet to do so can be found in the 1040 instructions.
“They might want to recommend that their clients increase their withholding on Social Security benefits, which can be done online at mySocialSecurity.gov. If withholdings have fallen short, we might need to send in estimated payments if our tax liability could be 10% or higher than in 2021,” Johnson added.
Higher Social Security income can also have negative implications for low-income seniors who receive income-related benefits such as SNAP and rental assistance. TSCL new Seniors Priority Survey conducted from May through July found that 39% of those surveyed who receive low-income benefits reported their low-income assistance was reduced due to this year’s 5.9% COLA, while 15% reported they lost access to at least one assistance program.
Further, 37% of survey participants reported receiving low income assistance in 2021—more than double the 16% receiving needs-based assistance prior to the pandemic as reported by the U.S. Census Bureau.
“This suggests that the pandemic and inflation have caused significantly higher numbers of adults living on fixed incomes to turn to these programs to supplement their Social Security and Medicare benefits as prices have continued to climb.”
Johnson added that Medicare Part B premiums may not grow by very much in 2023.
“The Medicare Trustees forecast in their 2022 annual report that the standard Part B premium in 2023 would stay the same as it is now, $170.10 (page 198),” Johnson said. “The Centers for Medicare and Medicaid Services (CMS) recently said that excess Part B premium charges in 2022 due to a reassessment of the premium would be used to reduce the Part B premium in 2023. However, this can change, and we probably won’t hear the announcement of Part B premium until mid-November.”
SEE ALSO:
• High June Inflation Leads to Double-Digit Social Security COLA Prediction
• 3 Bills Aiming to Strengthen Social Security: A Closer Look