Retirees will have an added reason to be happy once the new year begins. Their Social Security benefits will be higher starting in January.
In October, the Social Security Administration (SSA) announced a cost-of-living adjustment (COLA) of 8.7%. It's the biggest Social Security increase in 41 years. However, for some retirees, the actual amount you receive might not be quite as much as you expect.
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A complicated formula
You'd think determining how much you'll make with the latest Social Security COLA would be simple. Just take what you receive each month in 2022 and add 8.7% to the amount, right? Actually, it's more complicated than that.
The SSA won't apply the COLA directly to your current monthly benefit. Instead, the agency will increase your primary insurance amount (PIA) by 8.7%. What is this PIA? It's the benefit you'd get if you elected to start receiving Social Security retirement benefits at your full retirement age (also referred to as the normal retirement age). The calculation of the PIA is complex in its own right.
If you retired at your exact full retirement age, your monthly benefit will indeed increase by 8.7%. However, if you retired early, your increase will be slightly lower.
For example, let's suppose a worker retired at age 62 in 2022 and received the maximum monthly benefit payable of $2,364. The person's monthly benefit will be $2,569 in 2023. That's an increase of 8.67% -- just a little under the advertised COLA of 8.7%.
Does waiting until age 70 to retire affect your COLA? Nope. Your increase will be the standard 8.7% for any age on or after your full retirement age.
An illusion of a bigger bump
By the way, you might notice when you begin receiving your monthly Social Security payments in January 2023 that the amount is a little more than 8.7% higher than your monthly payment in 2022. However, it's just an illusion of a bigger bump.
If you receive Social Security, your Medicare Part B premiums are automatically deducted from your monthly benefit payments. The good news for retirees is that these premiums will be a little lower next year. This decrease could make your Social Security increase seem slightly greater than it really is.
Medicare premiums rose dramatically in 2022 because of the possibility of higher costs related to Alzheimer's disease drug Aduhelm. But the Centers for Medicare and Medicaid Services (CMS) decided against covering the drug except in approved clinical trials. As a result, the higher costs didn't materialize, and CMS was able to lower Medicare Part B premiums for 2023.
A shrinking COLA
Unfortunately, there are a couple of ways that many retirees' Social Security increases won't be as helpful as hoped. And these could apply regardless of when you retire.
Most importantly, the COLA might not be enough to cover your increased costs. In a recent Motley Fool survey, 55% of retirees said that the upcoming increase of 8.7% wouldn't be enough.
It's also possible you could experience another unpleasant surprise with the historic COLA. Because of the increase, more retirees will have to pay taxes on their Social Security benefits.
Retirees will certainly be better off in 2023 than they'd have been without the Social Security increase. However, you might find that early retirement, inflation, and/or taxes could result in a smaller boost from the big COLA than you expected.
