Counting on the Social Security COLA - Butler Financial, LTD


Counting on the Social Security COLA

Three things to keep in mind once higher Social Security benefits start rolling in.

Retirees will get their biggest “raise” from Social Security in 40 years. The cost-of-living adjustment, often called COLA, came in at 8.7% for 2023, significantly higher percentage-wise than its historical average, in a bid to keep pace with stubbornly high inflation. For context, Social Security and Supplemental Security Income (SSI) recipients saw a 5.9% increase for 2022, and the highest increase on record was 14.3% back in 1980.

COLA is based on the year-over-year increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers by the U.S. Bureau of Labor Statistics, though many argue this isn’t representative of retirees’ costs.

The 2023 COLA will apply to 70 million Americans – including 52.3 million people over age 65, as well as a broader group that encompasses survivors of beneficiaries‌ and‌ people receiving disability benefits‌ and SSI, the program for low income people.

The average increase of about $140 per month will likely be a welcome bit of relief for many, although it may not go far enough for the high number of seniors who rely heavily on Social Security as their primary source of income. According to a survey by The Senior Citizens League, inflation has eroded buying power and caused many to dip into emergency savings. Social Security benefits have lost 40% of their buying power since 2000, according to a new analysis by the same group.

“People who have been retired the longest have really been impacted the most, because they’ve had a cumulative effect where their COLA hasn’t been keeping up,” Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League, told CNBC.

Three things to keep in mind

The 2023 COLA increase might be a double-edged sword for some, as it could be enough to trigger undesirable tax implications and other financial considerations. Those who receive needs-based income assistance, for example, should confirm whether the COLA increase could have any potential negative impact to their benefits eligibility.

COLA increases potentially could trigger larger income-adjusted Medicare premiums if they’re enough to push some higher earners into the next tax bracket. For 2022, individuals whose 2020 income exceeded $91,000 ($182,000 for couples) had to pay more for Medicare Parts B and D. In previous years, higher Part B premiums reduced or eliminated the benefit of a COLA increase for some recipients.

It is worth noting that premiums for Medicare Part B, which covers things like outpatient services, were higher than expected in 2022, climbing 14.5% over 2021. Thankfully, that will not be the case for 2023. Standard Part B premiums for 2023 are expected to be about 3% lower than 2022 levels, so the COLA increase should feel more impactful overall.

For people who are worried about owing the IRS a bit more as a result of the income increase, you have a few options to talk through with your financial advisor and accountant. For example, if you’re collecting benefits but not old enough for Medicare, you can try a high-deductible healthcare plan that allows couples to sock away $8,300 into a health savings account, removing that money from their overall taxable income. Those still working may be able to increase contributions to a work-sponsored retirement plan and/or contribute to a traditional IRA to reduce their taxable base.

One last thing to keep in mind: All federal benefits must be direct deposited. So, if you haven’t already started receiving benefits, you need to establish electronic transfers to your bank or financial institution. Contact your financial advisor for more information.



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