More than 50 million Americans currently receive Social Security retirement benefits, and nearly 90% of retired workers say those monthly checks are an important source of income, according to Gallup. Regrettably, many of those people have faced financial hardships over the past year due to the difficult macroeconomic environment.

Recession fears have caused a dramatic drop in the stock market, erasing more than $3 trillion from retirement accounts. And persistent inflation has sent prices soaring in virtually every corner of the U.S. economy, though the impact has been especially profound in spending categories like gas, groceries, and utilities.

For those reasons, many retirees are anxiously awaiting news about the cost-of-living adjustment (COLA) that will be applied to Social Security benefits in 2023. The official figure will be announced on Oct. 13, 2022, but several experts have already forecast big numbers. For instance, the Committee for a Responsible Federal Budget says benefits could rise between 8.5% and 9% next year. That would be the biggest COLA since 1981.

However, there are a few other facts retirees must bear in mind regarding the Social Security COLA in 2023.

A retired couple examine various documents while sitting on the couch.

Image source: Getty Images.

Retirees will be notified of their new Social Security benefit in December

Each year, the Social Security Administration uses inflation data from the third quarter (July through September) to determine the COLA for the following year. That means the official COLA for 2023 can be calculated after the Bureau of Labor Statistics publishes its September inflation report on Oct. 13, at 8:30 a.m. ET.

However, the Social Security Administration does not calculate and distribute updated benefit information until December. In that month, retirees will be able to view their new benefit amount for 2023 via the Message Center of their "my Social Security" account, or they can wait to receive a COLA notice by mail.

Either way, retirees can expect to receive their first COLA-adjusted Social Security check in Jan. 2023.

The Social Security COLA in 2023 could underestimate inflation (again)

The Social Security Administration measures inflation and calculates COLAs using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). For example, the CPI-W increased 5.9% in the third quarter last year, so a 5.9% COLA was applied to Social Security benefits this year.

Unfortunately, inflation continued to accelerate after the 2022 COLA was finalized, and the year-over-year change in the CPI-W has now topped 8% for eight consecutive months. That means the 5.9% COLA applied to benefits in 2022 failed to offset the impact of inflation. In fact, the average Social Security recipient has been shortchanged by $418 as of August, according to The Senior Citizens League.

Fortunately, inflation has started to cool over the last two months. The year-over-year change in the CPI-W peaked at 9.8% in June, but it decelerated to 9.1% in July and 8.7% in August. That said, retirees should be aware inflation could reaccelerate, meaning the COLA applied to benefits in 2023 could once again underestimate the impact of rising prices.

That may sound far-fetched -- after all, experts are forecasting the largest COLA since 1981 -- but beneficiaries were in the exact same position last year. In fact, until the 2023 COLA becomes official, the 2022 COLA of 5.9% actually ranks as the largest COLA since 1981. With that in mind, retirees should continue to budget cautiously, regardless of how much benefits increase next year.

More retirees will likely owe income tax on Social Security benefits in 2024

Generally speaking, a big COLA in 2023 would be good news for retirees, especially if inflation continues to cool in the coming months. But there is a downside. Some retirees will have to pay a bigger tax bill in 2024.

Social Security income was first subjected to federal taxation in 1984. At the time, fewer than 10% of recipients actually had to pay tax on their benefits, simply because most fell short of the income thresholds. But things look much different today. The income thresholds have never been adjusted for inflation, and the steady stream of COLAs enacted since 1984 has pushed more beneficiaries over the limit. In fact, about 50% of Social Security recipients now pay tax on their benefits, according to the Congressional Research Service, and a big COLA in 2023 is sure to continue the upward trend.

The portion of Social Security benefits subject to taxation depends on two things: filing status and combined income. To clarify, combined income is defined as adjusted gross income plus nontaxable interest plus half of a recipient's Social Security benefit. The table below illustrates the different tax thresholds.

Taxable Portion of Benefits

Combined Income
(Individual Filers)

Combined Income
(Joint Filers)

Up to 50%

$25,000 to $34,000

$32,000 to $44,000

Up to 85%

$34,001 or more

$44,001 or more

Data source: Social Security Administration.

Each January, retirees receive a Social Security Benefit Statement (Form SSA-1099) detailing the amount of benefits they received in the previous year. That statement can be used in combination with this calculator from the Internal Revenue Service to determine the tax liability on Social Security benefits.