A record 8.7% Social Security COLA goes into effect

As inflation keeps prices high in 2022, Social Security beneficiaries can expect a record cost of living in 2023.

“In 2023, your Social Security benefits will increase by 8.7% due to cost-of-living increases,” the Social Security Administration says in annual reports it currently sends to beneficiaries.

8.7% growth will be the highest in the last 40 years. This is also a significant increase from the 5.9% increase in the cost of living that beneficiaries will see in 2022.

The increase is “a double-edged sword,” according to Jim Blair, a former Social Security administrator and co-founder and lead consultant at Premier Social Security Consulting, which educates consumers and financial advisers about the benefits of the program.

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“It’s good for people on Social Security,” Blair said. “Not so good for the economy with inflation.”

Social Security benefit checks will reflect the increase starting in January.

According to the Social Security Administration, the average retirement benefit will increase by $146 per month, from $1,681 in 2022 to $1,827 in 2023. The average disability benefit will increase by $119 per month, from $1,364 in 2022 to $1,483 in 2023, according to the Social Security Administration. will rise.

Plus, standard Medicare Part B premiums will drop about 3% next year to $164.90, a $5.20 decrease from 2022. Medicare Part B covers outpatient care, including doctor’s visits.

Monthly Part B premium payments are often deducted directly from Social Security checks. Beneficiaries are set to see more than an 8.7% increase in their monthly Social Security checks because of the 2023 premium drop.

“The good news about these letters is that people are realizing 100% of the 8.7% increase,” said David Freitag, a financial planning consultant and Social Security expert at MassMutual.

“Of course, the economics are horribly inflated, but that reflects the cost of cost-of-living adjusted benefits from Social Security,” Freitag said.

Few other income streams in retirement offer cost-of-living adjustments, he noted.

If you’re wondering how much more you’ll see in your checks, a personalized letter from the Social Security Administration will tell you what to expect.

This includes your new 2023 monthly benefit amount before deductions.

It will also tell you your monthly deductible for 2023 for premiums for Medicare Part B, as well as Medicare Part D, which covers prescription drugs.

The statement will also show the deduction for voluntary tax deduction.

After those deductions, the statement shows how much will be deposited into your bank account in January.

Note that you don’t necessarily need to get Social Security checks now to take advantage of the 2023 record increase, Blair noted.

“The good news is that you don’t have to apply for benefits to get a cost of living adjustment,” Blair said. “You just have to be 62 or older.”

If your income is above a certain amount, you may pay an additional payment in Medicare Parts B and D called an income-related monthly adjustment amount, or IRMAA.

This year, it will be determined by your 2021 tax returns, including your adjusted gross income and tax-exempt interest income. These two amounts are added together to get your modified adjusted gross income, or MAGI.

In 2023, those IRMAA premium rates go into effect if your modified gross income is $97,000.01 or more and you filed your tax return as single, head of household, qualifying widow or widower, or married filing separately ; or $194,000.01 or higher if you are married and filing jointly.

Note that just a dollar more can put you in a higher bracket.

“It’s important for everyone to make sure the adjusted gross income they use for their IRMAA surcharge matches what they reported on their tax return two years ago,” Freitag said.

If the information doesn’t match, “you should definitely file an appeal,” he said.

Freitag said IRMAA surcharges can be extremely significant, which is an area to watch for errors.

If your income has decreased since you filed your 2021 tax return, you can apply to IRMAA.

This is when you are affected by a life-changing event and your modified adjusted gross income falls below the bracket or below the lowest amounts in the table.

According to the Social Security Administration, a marriage eligible for life-changing events; divorce or annulment; death of spouse; you or your spouse have reduced your working hours or stopped working altogether; you or your spouse lost income from the property as a result of the disaster; you or your spouse have experienced suspension, cancellation or reorganization of an employer’s pension plan; or you or your spouse received a settlement from an employer or former employer in connection with a bankruptcy, closing, or reorganization.

To report this change, beneficiaries must complete Form SSA-44 with the appropriate documentation.

As your Social Security income increases at the 8.7% COLA, that could push you into a different IRMAA or tax bracket, Freitag noted.

This requires keeping a close eye on your income, he said.

Keep in mind that if you’re not careful, you could be exposed to IRMAA issues two years into the future.

In addition, more of your Social Security benefits may be subject to income tax. Up to 85% of Social Security income can be taxed based on a unique formula that also affects other income.

According to Marc Kiner, CPA and co-founder of Premier Social Security Consulting, it’s a good idea to withhold taxes from Social Security benefits to avoid tax liability when you file your income tax return.

“Do it as soon as you can,” Kiner said as she filled out the voluntary arrest request form.

To better gauge how IRMAA or taxes on benefits may affect you, it may help to consult with a tax advisor or CPA, who can help identify tax-saving strategies, Freitag said.