Social Security Inflation Adjustment to Boost Benefits by 8.7% in 2023, Biggest Since 1981 | November 2022
November 2022 | Volume 14, Issue 4
Read the full article on USA Today
Note: In addition to the article, please see the video entitled “Social Security Checks to Increase in January as Americans Feel the Weight of Inflation” included at the above-referenced internet address.
According to the article, Social Security benefits are set to rise by 8.7 percent next year – the fourth-biggest increase since automatic inflation adjustments were introduced in 1975.
This cost-of-living adjustment, or COLA, will boost the average monthly checks retirees receive in January by $146 to $1,827, the Social Security Administration said recently. That builds on last year’s 5.9 percent COLA increase, which was the largest bump since 1982. Before then, COLA increased by an average of 1.7 percent annually from 2010 to 2020.
The government bases its COLA adjustment on average annual increases in the consumer price index for urban wage earners and clerical workers from July through September. That index largely reflects the broad index that the Labor Department releases each month.
The index rose to 8.5 percent in September, the Labor Department announced recently.
Around half of Americans who are 65 or older live in households where Social Security benefits account for 50 percent of their income, according to multiple surveys conducted by the Census Bureau. One-quarter of them receive at least 90 percent of their income from Social Security.
These Americans, which tend to be lower income and do not have pensions, aren’t going to feel any different from the COLA increase, said Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League.
“This is not going to be like a big game changer in any way,” she said. “We're talking about maybe putting new tires on the car for winter or getting a new pair of glasses.”
What’s more, the index used to determine COLA, doesn’t accurately capture the costs older people and other types of Social Security recipients face, Johnson said. For instance, seniors tend to spend much more of their incomes on medical care than urban wage earners.
The upside is Medicare Part B premiums, which are automatically deducted from monthly Social Security checks, are going down by $5.20 a month to $164.90 in 2023.
"This year’s substantial Social Security cost-of-living adjustment is the first time in over a decade that Medicare premiums are not rising and shows that we can provide more support to older Americans who count on the benefits they have earned,” Acting Commissioner Kilolo Kijakazi said.
But for Americans who have additional sources of income to soften the blow of inflation, “this really is just extra money,” said Matt Sotir, a financial adviser with Equitable Advisors. “For most families, this is really just going to be backfilling the hole that that inflation is digging for them.”
Anyone who is eligible to receive Social Security benefits will automatically get the inflation adjustment. That includes retirees 62 or older and disabled and blind people. In some cases, their spouses or surviving spouses and surviving dependents can collect Social Security benefits.
Like Social Security, Veteran Affairs benefits and pensions are tied to the same COLA as Social Security. So, recipients should see an 8.7 percent increase in January 2023. The Department of Veterans Affairs is set to release finalized VA compensation rates on December 1.
If your combined income, which includes half of your Social Security benefits and your adjusted gross income, is at least $34,000 for individuals or $44,000 for joint tax filers, up to 85 percent of your benefits could be taxable. These figures have not been adjusted for inflation and were last changed in 1984.
The trust fund that pays Social Security benefits to retirees, disabled people and their dependents will be depleted by 2035, according to the Social Security Board of Trustees’ June report. That’s one year later than the Board projected last year since more Americans returned to work, boosting Social Security revenue collected through federal payroll taxes. At that time, the trust fund would be sufficient to pay about 80 percent of scheduled benefits.
But the new COLA increase will likely move that date up since it will drain more money from the trust, said Johnson.
And if the economy falls into recession next year, as many economists are predicting, that will exacerbate the insolvency date since 90 percent of Social Security funding comes from payroll taxes.
“A recession would be a crisis for Social Security,” she said.
Discussion Questions
1. What is a COLA? Are COLA for Social Security automatic (i.e., provided annually?) If not, should they be?
A COLA is a “cost of living adjustment.” COLAs recognize that inflation erodes the purchasing power of the dollar, and that changes (increases) are needed to account for that. Social Security COLAs are automatic. According to www.ssa.gov, beginning in 1975, Social Security started automatic annual cost-of-living allowances. The change was enacted by legislation that ties COLAs to the annual increase in the Consumer Price Index (CPI-W).
For more information regarding Social Security COLAs and the Consumer Price Index, please see the following internet addresses:
https://www.ssa.gov/cola/#:~:text=Beginning%20in%201975%2C%20Social%20Security,value%20from%20Social%20Security%20benefits.
https://www.bls.gov/cpi/#:~:text=The%20Consumer%20Price%20Index%20(CPI,U.S.%20and%20various%20geographic%20areas.
2. Using Social Security COLAs as a model, should the minimum wage for workers be subject to COLAs? Why or why not?
This is an opinion question, so student responses may vary. In your author’s opinion, it seems rational to conclude that if Social Security includes cost of living adjustments, the minimum wage should as well. The federally mandated minimum wage of $7.25 per hour has not changed since 2009. Using a simple inflation calculator that incorporates the U.S. Consumer Price Index (www.usinflationcalculator.com), $7.25 in 2009 is $10.03 today. Also keep in mind that those who are working at the minimum wage are currently working for their income, while Social Security is passive (although necessary!) income. According to the National Institute on Retirement Security, approximately 40 percent of older Americans rely on Social Security for retirement income (https://www.nirsonline.org/2020/01/new-report-40-of-older-americans-rely-solely-on-social-security-for-retirement-income/#:~:text=The%20report's%20key%20findings%20are,from%20Social%20Security%20in%20retirement.)
3. As the article indicates, “(t)he government announced the maximum amount of earnings subject to the Social Security tax will increase to $160,200 in 2023 from $147,000 this year, a 9 percent increase.” Further, “(t)he trust fund that pays Social Security benefits to retirees, disabled people and their dependents will be depleted by 2035, according to the Social Security Board of Trustees’ June report. That’s one year later than the Board projected last year since more Americans returned to work, boosting Social Security revenue collected through federal payroll taxes. At that time, the trust fund would be sufficient to pay about 80 percent of scheduled benefits.” In your reasoned opinion, what (if anything) should be done to “shore up” financially the Social Security System? Explain your response.
Although raising the age of eligibility for Social Security (for full retirement benefits and/or early retirement benefits) is certainly an option, it is not a popular one. For those born after 1960, the age for early (i.e., reduced) Social Security retirement benefits is 62, and 67 for full retirement benefits. One option referenced indirectly in the article is raising the amount of income subject to the Social Security tax. As mentioned in the article, in 2023, the maximum amount of annual income subject to the Social Security tax is $160,200. Any income above that amount is not subject to the Social Security tax. Raising that cap would go a long way toward solving the Social Security budgetary “crisis.”