Will Social Security's next cost-of-living adjustment (COLA) make 2022's seem negligible? There's reason to believe it might.
Granted, it's too soon to land on a solid estimate because we need third quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to calculate that number precisely. The CPI-W measures changes in the cost of goods and services, and a big component of it is gas prices. Those have eased in recent weeks, but we don't know what the second half of August and September have in store.
Either way, though, seniors could be looking at a 2023 COLA that's upward of 8%, and one that may be close to 11% based on previous estimates. Even if we land in the middle, that could give seniors a raise in the 9% range, which is far more substantial than the 5.9% COLA they got going into 2022.
Image source: Getty Images.
But while a large Social Security raise might seem like a good thing, in reality, it can have its drawbacks. Here's why.
1. It means living costs are up across the board
When Social Security benefits go up, it means inflation levels are high enough to justify that boost. But that doesn't help seniors get ahead financially by any means. If anything, it maybe allows them to just keep up with rising living costs. And often, that doesn't even happen because COLAs are calculated based on a limited data set.
2. It could push some seniors into a higher tax bracket
Many seniors struggle with bills and can't afford any tax surprises. But a large COLA could push some Social Security recipients into a higher tax bracket, leaving them with a higher IRS burden to bear.
Not only that, but taxes on Social Security benefits themselves come into play once earnings reach a moderate level. Those who collect Social Security but also take modest nest egg withdrawals could end up having some of their benefits taxed.
3. It could cause some seniors to pay more for Medicare
Medicare's standard Part B premium changes from year to year. But higher earners pay more than the standard amount. And a large jump in Social Security benefits could put some seniors in the position of having to bear higher Part B premium costs.
And it's not just Part B. Higher earners also face a surcharge on their Part D premiums.
Now a large 2023 COLA won't automatically subject seniors to higher Medicare costs, because surcharges are based on reported income from two years prior. But if Social Security benefits go up a lot, some seniors could face higher premiums a couple of years down the line.
Keep things in perspective
Clearly, seniors need a reasonably generous COLA for 2023 to keep up with living costs. But it's important to recognize that a whopping COLA may not be the wonderful thing beneficiaries are wired to think it is. In a best-case scenario, seniors will be able to use that raise to better manage their bills. But it's unlikely to put most Social Security recipients in a much stronger financial position than they're in now.
