Social Security can go a long way toward making retirement more affordable, but with inflation continuing to surge, it's getting harder for retirees on a fixed income to make ends meet.
Fortunately, relief could be on the horizon. Next month, the Social Security Administration (SSA) will announce the cost-of-living adjustment (COLA) for 2023. The COLA is an increase in benefits aimed to help Social Security maintain its purchasing power.
Annual COLAs are normal, and retirees will receive a small boost in benefits most years. However, next year's adjustment will be historic, and beneficiaries can expect a much larger-than-average raise.
What will the COLA for 2023 be?
We won't know the official COLA until October, as the SSA will wait until the September inflation data is released before it makes its announcement.
However, nonprofit organization The Senior Citizens League estimates that the COLA for 2023 could be around 8.7%, according to the latest consumer price index (CPI) data from the Bureau of Labor Statistics. That's an increase of around $144 per month for the average retiree.
For context, the COLA generally increases around 1% to 3% most years. This year, beneficiaries received a 5.9% raise, which was one of the largest in recent history. An 8.7% COLA would be the highest since 1981.
Other ways this could impact your benefits
A record-breaking COLA doesn't just mean an increase in benefits each month. The annual COLA affects several aspects of Social Security, and there are a few differences you may notice in 2023:
- A higher maximum benefit amount: In 2022, the most you can receive from Social Security is $4,194 per month. But because this number changes each year to account for cost-of-living changes, a higher COLA means there will likely be a higher max benefit for 2023.
- Increased maximum taxable earnings limit: If you haven't yet retired, the maximum income subject to Social Security taxes is $147,000 per year. This limit also changes yearly because of inflation, so it will likely increase after next year's COLA. This means higher earners will have more of their income subject to taxes.
- A higher earnings limit: If you continue working after claiming Social Security and you haven't yet reached your full retirement age (FRA), your benefits may be reduced if your income exceeds the annual earnings limit. In 2022, that limit is $19,560 per year (assuming you're still under your FRA). But with a higher COLA comes a higher earnings limit, which means you'll be able to earn more without facing reductions.
- Increased spousal and divorce benefits: The COLA doesn't just apply to retirement benefits. If you're receiving other types of Social Security -- such as spousal benefits, divorce benefits, or Supplemental Security Income (SSI) -- you'll receive a boost in 2023 as well.
The COLA affects most areas of Social Security, so whether you're already retired or planning to start claiming benefits soon, expect quite a few changes in 2023.
How to prepare for next year's COLA
The new COLA won't take effect until January 2023, and there's nothing you need to do between now and then. The changes will take place automatically, so you won't need to apply for the increase.
With inflation surging, a higher benefit amount can go a long way toward making everyday essentials more affordable. Just by understanding all the ways that next year's COLA will affect your benefits, you can ensure you're as prepared as possible.