Those who plan on partaking in Social Security benefits in 2023 now have something extra to look forward to come January. Last week, the Social Security Administration (SSA) announced the most significant benefits hike since 1980 under the Reagan presidency when Social Security recipients received a 14.3% cost-of-living increase.
In 2023, the adjustment will be an 8.7% increase. But even with this boost in benefits, is it enough to outpace the current abnormally high rate of inflation? And will this cost-of-living adjustment (COLA) translate to setbacks in other areas of concern? Here’s what you need to know.
For assistance sorting out your retirement plans and how Social Security fits into it, consider working with a financial advisor.
COLA: What It Is, History and Who Qualifies
COLA is an acronym that stands for cost-of-living adjustment. It’s the Social Security Administration’s attempt at keeping up with rising inflation costs that diminish the real value of Social Security payments for beneficiaries (retirees and disability recipients).
Beginning in 1975, Social Security payments have been adjusted whenever there was a cost-of-living increase based on the Consumer Price Index. In recent years, we’ve seen increases as low as 1.3% (2020), and in some years there’s been no increase at all (2009, 2010 and 2015).
Will The 2023 COLA Outpace Inflation?
No. Although COLA is put in place to keep up with inflation, it’s not always successful. With abnormally high inflation rates like we’ve seen this year, the 2022 5.9% COLA was not commensurate with inflation. Sky-high inflation in 2023 will likely outpace the Social Security COLA.
How the 2023 COLA Will Affect Recipients
There are a few factors to be aware of with this round of cost-of-living adjustments.
Payment increases: Retirees and disabled people who receive Social Security should expect a pay bump. The increase will begin to show in January 2023 payouts. To calculate your estimated increase, multiply your current monthly benefit by 8.7% and add this to your existing check amount. For instance, the SSA averages a monthly payout of $1,680 for retirees. An 8.7% increase on this amount would yield about $147 extra bringing the new payout to $1,827.
Medicare cost decrease: In recent years COLA has been a wash for many due to rising Medicare costs. Since Medicare is automatically deducted from Social Security benefits, recipients typically don’t realize that COLA bump in any material way in their savings.
Instead, the increased Medicare premiums would cancel out the rise in inflation adjustments. However, standard Part B Medicare premiums are set to fall in 2023, albeit by a low amount ($5.20). Still that will likely allow recipients to keep the COLA increase as well as the additional premium savings.
The COLA 2023 Increase: A Short-Term Gain, Still A Long-Term Challenge
Social Security insolvency is a perennial fear. The COVID pandemic only heightened the anxiety around insolvency by adding a new cohort of disability claims as well as a decline in tax payroll revenue contributions.
The program is currently funded by a 12.4% tax on payroll revenue as well as trust fund interest. However, the combined weight of both growing disability and retiree beneficiaries has begun to outpace the funding and is forcing the government to use reserves as coverage. According to a Social Security Administration report, these reserves are set to be depleted to the point of reducing benefits within 12 years (2034), sooner if economic fallout continues.
The Bottom Line
The good news is the Social Security COLA will see its highest increase in 40 years at 8.7% and there won’t be any rise in Medicare premiums to counteract this payout. The bad news is COLA will not outpace inflation costs once again for the upcoming year, putting more pressure on beneficiaries’ already tight budgets.
With anxiety around Social Security insolvency on the rise, preparing and protecting your other retirement income sources will be your saving grace. The SSA states that Social Security is not meant to be your sole income source for retirement, although about one in five people use it as such. Instead, it’s meant as a supplement to your retirement income. Averaging to meet only 40% of your needs.
Need a shortcut to calculating how much retirement savings you’ll need? Smartasset’s retirement calculator can give you perspective. For help building a strong retirement plan better shielded from the ebb and flow of economic downturn and the potential loss of future Social Security benefits, contact a financial advisor.
Tips for Retirement Planning
- Saving is important. But you likely can’t stow away enough to last all of your golden years. You’ll need your savings to grow through investments. For help with this, contact a financial advisor. Our free matching tool will put you in touch with three fiduciary advisors who fit your needs.
- Taxes can take a big chunk out of your retirement income, depending on where you live. To find out if you should relocate after you hang up your hat, check our story on the best states to retire for taxes.