A major announcement is coming this week that will affect the bottom lines of roughly 70 million Americans. On Thursday, Oct. 13, the Social Security Administration will announce the cost-of-living adjustment (COLA) for 2023.
This year's Social Security raise is expected to be the highest in more than four decades. The Senior Citizens League projects Social Security checks will jump by 8.7% in 2023 -- which would be the largest increase since 1981. Keep reading to learn how Social Security COLAs are calculated -- and what that number means for you.
How Social Security calculates COLAs
An 8.7% Social Security increase may sound like good news at first blush. For comparison, between 2011 and 2020 decade, benefits increased by 2% or less in eight out of 10 years. The bad news, of course, is that the big boost that's expected is the result of skyrocketing inflation.
Social Security COLAs are determined by year-over-year changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter. This inflation metric is calculated by the U.S. Bureau of Labor Statistics and released each month. In Q3 of 2021, the average CPI-W was 268.421, a 5.9% increase over the average CPI-W of 253.412 for Q3 of 2020. As a result, Social Security recipients saw their checks increase by 5.9% in 2022.
Several senior advocacy groups have criticized using the CPI-W to determine Social Security increases. One big shortcoming: The survey used to calculate the CPI-W measures cost increases for households that get at least half of their income from working. Moreover, at least one household member must have been employed for at least 37 weeks in the last 12 months.
As a result, the CPI-W fails to track the spending of most households headed by someone who's retired. Critics say that's problematic because senior households have different spending patterns than working households. For example, working individuals spend more on transportation and gasoline, while seniors spend a greater share of their incomes on medical costs, housing, and food.
The Senior Citizens League based its projected 8.7% forecast on CPI-W values for July and August 2022. The Bureau of Labor Statistics will release September's CPI-W on Thursday around the same time the Social Security Administration is expected to announce next year's COLA.
What will an 8.7% Social Security raise mean for you?
The average Social Security benefit for retired workers was $1,672 as of August 2022. If benefits go up by 8.7%, the average retired worker would see their monthly check rise to $1,817, an increase of about $145.
But for some Social Security recipients, bigger monthly payments will also trigger a bigger tax bill. Social Security benefits aren't taxable for single people with incomes of less than $25,000 or married people filing a joint return with combined incomes below $32,000.
However, 50% of Social Security benefits are taxable for individuals with incomes between $25,000 and $34,000, and married couples with incomes of $32,000 to $44,000. And 85% of benefits are taxable for individuals whose incomes are above $34,000 and married couples bringing in more than $44,000 per year.
One silver lining: Standard Medicare Part B premiums will drop by $5.20 in 2023. That may not sound like a big deal, but considering that standard Part B monthly premiums rose by $21.60 last year -- eating away at 2022's 5.9% COLA -- that comes as a bit of welcome news.
The bottom line: Social Security's 2023 increase will provide some relief to seniors struggling with soaring costs, but many will still find their budgets stretched thin. It's also essential to plan for the potential tax increase if you receive benefits.
While a bump in benefits can't come soon enough for many recipients, don't expect fatter checks right away. Social Security beneficiaries won't see their COLAs until they receive their checks in January.