Social Security benefits are set to rise by 8.7% next year – the fourth-biggest increase since automatic inflation adjustments were introduced in 1975.
This cost-of-living adjustment, or COLA, will boost the average monthly checks retirees receive in January by $146 to $1,827, the Social Security Administration said Thursday. That builds on last year’s 5.9% COLA increase, which was the largest bump since 1982. Before then, COLA increased by an average of 1.7% annually from 2010 to 2020.
The government bases its COLA adjustment on average annual increases in the consumer price index for urban wage earners and clerical workers from July through September. That index largely reflects the broad index that the Labor Department releases each month.
The index rose to 8.5% in September, the Labor Department announced Thursday.
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Will Social Security recipients feel the COLA increase?
Around half of Americans who are 65 or older live in households where Social Security benefits account for 50% of their income, according to multiple surveys conducted by the Census Bureau. One-quarter of them receive at least 90% of their income from Social Security.
These Americans, which tend to be lower income and don’t have pensions, aren’t going to feel any different from the COLA increase, said Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League.
“This is not going to be like a big game changer in any way,” she said. “We’re talking about maybe putting new tires on the car for winter or getting a new pair of glasses.”
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What’s more, the index used to determine COLA, doesn’t accurately capture the costs older people and other types of Social Security recipients face, Johnson told USA TODAY. For instance, seniors tend to spend much more of their incomes on medical care than urban wage earners.
Medicare Part B premium 2023
The upside is Medicare Part B premiums, which are automatically deducted from monthly Social Security checks, are going down by $5.20 a month to $164.90 in 2023.
“This year’s substantial Social Security cost-of-living adjustment is the first time in over a decade that Medicare premiums are not rising and shows that we can provide more support to older Americans who count on the benefits they have earned,” Acting Commissioner Kilolo Kijakazi said.
But for Americans who have additional sources of income to soften the blow of inflation, “this really is just extra money,” said Matt Sotir, a financial adviser with Equitable Advisors. “For most families, this is really just going to be backfilling the hole that that inflation is digging for them.”
Who is eligible for Social Security COLA?
Anyone who is eligible to receive Social Security benefits will automatically get the inflation adjustment. That includes retirees 62 or older and disabled and blind people. In some cases, their spouses or surviving spouses and surviving dependents can collect Social Security benefits.
VA compensation rates
Like Social Security, Veteran Affairs benefits and pensions are tied to the same COLA as Social Security. So recipients should see an 8.7% increase in January. The Department of Veterans Affairs is set to release finalized VA compensation rates on Dec. 1.
Social Security income tax limit 2023
If your combined income, which includes half of your Social Security benefits and your adjusted gross income, is at least $34,000 for individuals or $44,000 for joint tax filers, up to 85% of your benefits could be taxable. These figures have not been adjusted for inflation and were last changed in 1984.
The government announced the maximum amount of earnings subject to the Social Security tax will increase to $160,200 in 2023 from $147,000 this year, a 9% increase.
When will Social Security run out of money?
The trust fund that pays Social Security benefits to retirees, disabled people and their dependents will be depleted by 2035, according to the Social Security Board of Trustees’ June report. That’s one year later than the Board projected last year since more Americans returned to work, boosting Social Security revenue collected through federal payroll taxes. At that time, the trust fund would be sufficient to pay about 80% of scheduled benefits.
But the new COLA increase will likely move that date up since it will drain more money from the trust, said Johnson.
And if the economy falls into recession next year, as many economists are predicting, that will exacerbate the insolvency date since 90% of Social Security funding comes from payroll taxes.
“A recession would be a crisis for Social Security,” she said.
Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here