Every October, the Social Security Administration announces how much of a cost-of-living adjustment (COLA) the program's beneficiaries will receive for the following year. Those annual increases have topped 11% only twice since 1975, when automatic annual COLAs were first implemented.
The Committee for a Responsible Federal Budget, a nonprofit public policy organization, predicts that the COLA for 2023 will be huge -- potentially as high as 10.8%. Even if that prediction is overly optimistic, the third-largest Social Security increase ever could realistically be on the way. But here are three reasons why retirees shouldn't cheer just yet.
Image source: Getty Images.
1. Your cost of living could go up even more
Social Security COLAs are intended to help seniors maintain their standard of living as prices rise due to inflation. However, their actual costs will probably increase by a greater percentage than the COLA -- no matter what percentage that boost turns out to be.
The ugly secret for Social Security is that its COLAs don't keep up with the real inflation rate for retirees. The Senior Citizens League conducted a study that found Social Security benefits have lost a whopping 40% of their buying power since 2000. During this period, COLA increases were given in all but three years.
One key reason for that erosion in buying power is the way COLAs are calculated. Social Security bases them on the changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Although the CPI-W measures inflation based on the prices of a large basket of goods and services, that basket does not include healthcare costs. Medicare Part B premiums soared 14.5% this year, more than even the highest estimate for the upcoming Social Security increase.
2. Your Medicare premiums could increase
Speaking of higher Medicare premiums, some retirees may pay even more for them as a result of next year's big Social Security increase. Both Medicare Part B and Part D premiums are based on annual income, so the COLA could push some Social Security recipients into a higher bracket.
The Medicare premium rates for 2023 haven't been announced yet. Below are the income brackets for Medicare Part B and Part D that are effective this year based on annual income in 2020.
| Income for Individual Filers | Income for Married Couples Filing Jointly | Income for Married but Filing Separately |
|---|---|---|
| $91,000 or less | $182,000 or less | $91,000 or less |
| $91,001 to $114,000 | $182,001 to $228,000 | Not applicable |
| $114,001 to $142,000 | $228,001 to $284,000 | Not applicable |
| $142,001 to $170,000 | $284,001 to $340,000 | Not applicable |
| $170,001 to $499,999 | $340,001 to $749,999 | $91,001 to $408,999 |
| $500,000 or above | $750,000 or above | $409,000 or above |
Data source: Medicare.gov.
While the rates will be different for next year, it's likely that the income brackets will remain the same. If you're on the bubble of moving into a higher bracket, it's possible that the next Social Security COLA will boost your Medicare premiums down the road.
3. Your taxes will probably be higher
There's a pretty good chance that your income taxes will be higher as a result of the big COLA that's on the way. Twelve states tax Social Security benefits at least in some cases -- Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. You must pay federal taxes on your Social Security benefits if:
- You file an individual federal tax return and your income tops $25,000.
- You file a joint federal tax return and your combined income is more than $32,000.
- You're married and file a separate return (in most cases).
It's also possible that the COLA could bump you into a higher tax bracket. In 2022, the marginal tax rates were:
| Income for Individual Filers | Income for Married Couples Filing Jointly | Top Marginal Federal Tax Rate |
|---|---|---|
| Over $215,950 | Over $431,900 | 35% |
| Over $170,050 | Over $340,100 | 32% |
| Over $89,075 | Over $178,150 | 24% |
| Over $41,775 | Over $83,550 | 22% |
| Over $10,275 | Over $20,550 | 12% |
| $10,275 or less | $20,550 or less | 10% |
Data source: Internal Revenue Service.
Looking at the glass as half-full
The bottom line is that the big Social Security increase that's likely on the way might not be as great as it seems. But that's the pessimistic perspective. For retirees who prefer to look at the glass as half-full instead of half-empty, the good news is that at least some relief is coming to help them compensate for soaring prices.
