The past 12 months have brought some of the highest inflation rates in more than 40 years. For retirees, the annual Social Security Cost-of-Living Adjustment [COLA] could provide some relief from soaring prices.
Each October, the Social Security Administration announces an annual benefit adjustment based on the inflation rate. In 2023, Social Security and Supplemental Security Income [SSI] beneficiaries will see the highest increase in their benefit amounts in more than 40 years.
2023 Social Security Cost-of-Living Adjustment
At 8.7%, the Social Security Cost-of-Living Adjustment [COLA] for 2023 is the highest since 1981. Since 1975, the average COLA has been 3.68%, and there have been just 3 prior instances of COLAs exceeding 8.7% – all of which occurred between 1979 and 1981.
In 2023, the average retiree will see an additional $146 in their monthly benefit check, taking it from $1,681 to $1,827. The maximum monthly benefit for a retired worker beginning Social Security at their full retirement age will also increase by $282 to $3,627.
How is the Annual Social Security COLA Calculated?
The Social Security Administration determines the annual COLA based on increases in consumer prices over the past 12 months as measured by changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers [CPI-W]. This index is based on the spending patterns of urban workers across the United States and includes more than 200 items. CPI-W differs from the more commonly used CPI-U which includes price changes for a broader selection of people including self-employed, unemployed, and retired people. For this reason, the inflation rate used to calculate the Social Security COLA may not match perfectly with the rate that you’ve seen in popular media reports.
The rate of inflation used to calculate the Social Security COLA is the change in the CPI-W from the third quarter of the previous year through the third quarter of the current year. For the 2023 COLA, the calculation was based on price increases from Q3 2021 through Q3 2022.
COLA for Those Who Are Delaying Benefits
As you may know, if you delay Social Security benefits past your Full Retirement Age, your benefits are increased. For those born after 1943, benefits increase by 8% for each year that they are delayed until you reach age 70.
Those delaying Social Security benefits do not miss out on COLAs. These annual increases take effect each year you are eligible for Social Security – even if you have not begun taking benefits.
The Impact of Medicare Costs on Social Security COLAs
Many Social Security beneficiaries have their Medicare Part B premiums deducted from their monthly Social Security payment. In most years, Medicare Part B premiums increase, which can reduce the benefit you see from your Social Security COLA. However, in 2023, Medicare Part B premiums will decrease by $5.20 per month. Therefore, if you have your Medicare Part B premiums automatically deducted from your Social Security benefits, you could see an even greater increase in your monthly payments next year.
Timing for 2023 COLA Increases
Approximately 65 million Social Security recipients will see their benefits increase by 8.7% beginning in January 2023. Additionally, the 7 million SSI beneficiaries will see their payments increased slightly earlier, starting on December 30, 2022.
In December, you will be able to review your Social Security account online to learn how much your benefits will increase for next year. Also, you should receive a letter in December from the Social Security Administration detailing your benefits for the upcoming year. If you have any questions regarding this letter or your Social Security benefits, contact an experienced financial advisor to discuss.
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At Meld Financial, our team of financial, legal, and tax professionals can help you navigate the intricacies of Social Security and Medicare. Our experienced advisors can also help you plan, save, and invest for retirement.
Through decades of experience in managing clients’ wealth, we have developed a process called Financial Fingerprint® – a comprehensive financial plan that is quick to assemble, easy to understand and simple to modify as your circumstances change. With your Financial Fingerprint®, you can be confident that you are working to maximize your benefits from government programs like Social Security and Medicare.
To learn more, contact us.
