Seniors on Social Security had a hard time coping with inflation in 2022. And a big reason had to do with the fact that their cost-of-living adjustment (COLA) only came in at 5.9%. Because the rate of inflation far surpassed 5.9% last year, seniors lost out on buying power at a time when just about every single living expense imaginable was on the rise.
But things are shaping up to be very different in 2023. This year, seniors on Social Security are getting an 8.7% COLA -- the largest raise to arrive in decades.
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Meanwhile, in recent months, the pace of inflation has slowed modestly. That doesn't mean we're not still starting off the year with higher-than-average living costs. But it does mean that for the first time in a long time, Social Security recipients might actually gain buying power based on their COLAs, rather than lose it.
Another reason Social Security beneficiaries might come out ahead financially this year? Medicare costs are shrinking, not rising.
Medicare enrollees who are also on Social Security have their Part B premium costs deducted from their benefits automatically. But since the cost of Medicare is down in 2023, seniors should get to keep their 8.7% COLAs in full.
While a nice boost to Social Security might help recipients better manage their expenses in 2023, it could also lead to higher Medicare costs for some down the line. And that's something seniors should keep in mind so they're not thrown for a loop.
Will a higher monthly Social Security benefit drive your Medicare costs up?
Medicare sets a standard monthly premium for Part B that changes from year to year. But higher earners are assessed a surcharge for Part B known as an Income-Related Monthly Adjustment Amount, or IRMAA.
In fact, IRMAAs don't just apply to Part B -- they apply to Part D drug plans, as well. And the specific surcharge you have to pay is based on factors like your income and tax-filing status.
How does 2023's Social Security COLA relate to IRMAAs? It's simple. Some seniors may be pushed into a higher tax bracket this year due to a far more generous monthly benefit. That could result in higher Medicare costs.
The Social Security Administration (SSA) assesses these surcharges based on income reported from two years prior. So in 2025, the SSA will use income from 2023 to determine if an IRMAA applies to you or not.
Since those surcharges don't take effect right away, some seniors may not realize that a lift in their 2023 income could result in higher Medicare costs. But that's an expense that needs to be accounted for ahead of time.
A mixed bag
For the most part, a generous Social Security COLA is a good thing, but it can have unwanted financial consequences. In addition to leading to Medicare surcharges, it could also bump some seniors' income up to the point where they face federal taxes on a portion of their Social Security benefits.
That's why it could be beneficial to consult with a tax professional if you have concerns about the impact of a large COLA. While a giant raise is certainly something to celebrate, it has the potential to result in some negative consequences, as well.
