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Amid record high inflation, Social Security beneficiaries will see an 8.7% increase in their benefits in 2023, the largest increase in 40 years.
The Social Security Administration announced the change Thursday. This would result in an average monthly benefit increase of more than $140 starting in January.
The average benefit for Social Security retirees will increase by $146 a month, from $1,681 in 2022 to $1,827 in 2023.
The League of Senior Citizens, a nonpartisan seniors group, estimated last month that the COLA could be 8.7% next year.
The approved 8.7% benefit exceeds the 5.9% increase beneficiaries saw in 2022, which was then the highest in four decades.
The last time cost-of-living adjustments were higher was in 1981, when growth was 11.2%.
Next year’s record increase comes as beneficiaries struggle with rising prices this year.
“COLAs are really about people looking down the drain; they’re not benefit increases,” said Dan Adcock, director of government relations and policy at the National Committee for Social Security and Medicare Protection.
“They’re trying to hedge more against inflation so people can maintain their standard of living,” Adcock said.
How much can your Social Security check be?
Beneficiaries can expect to see the 2023 COLA in their benefit checks starting in January.
But starting in December, you can see online notices from the Social Security Administration telling you how much your checks will be next year.
Two factors—Medicare Part B premiums and taxes—can affect the size of your benefit checks.
The standard Medicare Part B premium will be $5.20 lower next year, from $170.10 to $164.90. These payments are often deducted directly from Social Security benefit checks.
“That means beneficiaries could keep almost all or most of the COLA increase,” Mary Johnson, Social Security and Medicare policy analyst for the League of Senior Citizens, told CNBC.com this week.
This can change if you have money withheld from your monthly checks for taxes.
To measure how much more money you could see next year, take your net Social Security benefit and add it to your Medicare premium and add it up to the 2023 COLA.
“It will give you a good idea of how much your increase will be,” said Joe Elsasser, founder and president of Covisum, an Omaha, Nebraska-based certified financial planner and Social Security claim software provider.
How COLA is related to inflation
COLA applies to approximately 70 million Social Security and Supplemental Security Income beneficiaries.
The change is based on the Consumer Price Index, or CPI-W, for city wage earners and clerical workers.
The Social Security Administration calculates the annual COLA by measuring the change in the CPI-W from the third quarter of the previous year to the third quarter of the current year.
Benefits do not necessarily increase every year. In 2009, there was a record 5.8% growth, followed by 0% growth in the following two years.
“For the elderly, those were difficult years because they spent a lot of money on health care,” Adcock said.
According to Johnson, a similar pattern could occur if the economy goes into recession.
What COLA means if you haven’t claimed benefits yet
If you decide to claim Social Security benefits, you’ll have access to a record COLA.
According to Elsasser, if you wait to start your benefit checks later, you’ll have access to it, too.
If you are currently age 62 and do not claim, your benefit is adjusted by each COLA until you do.
Plus, delaying benefits can increase the size of your monthly checks. Experts generally recommend that most people wait until age 70 as long as possible because benefits increase by 8% per year from your full retirement age (typically 66 or 67) until 70. Whether or not this strategy is ideal depends on other factors, such as your personal health and family situation.
“The amount of the COLA really shouldn’t affect the claim,” Elsasser said. “It doesn’t hurt you or help you as much as you claim, because you’re going to get it either way.”
How record high growth could affect Social Security funds
The Social Security Board of Trustees said in June that Social Security funds could pay full benefits by 2035.
Then the program will be able to pay 80% of the allowance, board projects.
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According to the Committee for a Responsible Federal Budget, a historically high COLA in 2023 could accelerate the depletion of trust funds by at least a calendar year ahead.
Higher wages could prompt workers to contribute more payroll taxes to the program, which could help offset it. In 2023, the maximum taxable earnings will rise to $160,200 from $147,000 this year.
What if future benefits increase
Although 2023 will mark a record high COLA, beneficiaries should prepare for future years when increases are not as high.
If inflation declines, the size of COLAs will also decline.
Whether the CPI-W is the best measure of annual increases is a matter of debate. Some tout the Consumer Price Index for Seniors, or CPI-E, as a better measure of what seniors pay. Numerous Democratic congressional bills have called for annual increases to be changed to this size.