As expected, the Social Security Administration has announced that the 2023 Cost of Living Adjustment (COLA) will be the largest COLA in 42 years, brought on by rampant inflation not seen in more than four decades.
Social Security benefits increase automatically if the Consumer Price Index (CPI-W) which measures price inflation for urban workers is more in the third quarter of the current year compared to the third quarter of the previous year. Over the past 10 years, the average COLA was 1.8% with no increase in 2016. But fast-track inflation created a 2022 COLA of 5.9%, the largest in 40 years, and continued to skyrocket creating next year’s 8.7% COLA, the biggest one-year increase since Social Security checks increased by 11.2% in 1981.
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| a The COLA for December 1999 was originally determined as 2.4 percent based on CPIs published by the Bureau of Labor Statistics. Pursuant to Public Law 106-554, however, this COLA is effectively now 2.5 percent. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Percentages are great, but what does it mean in dollars? The average Social Security recipient in 2022 receives $1,681 per month. Next year’s Cost of Living Adjustment will increase that to $1,827, an increase of $146.
But here’s more good news. You don’t have to be receiving Social Security in 2023 to get the benefit of next year’s big increase. The 8.7% adjustment, along with every other COLA awarded from the time a person turns 62 until they file for benefits will automatically be included in their future Social Security benefits.
The 8.7% COLA for 2023 also affects how much beneficiaries can earn from a job without jeopardizing any of their benefits if they claim Social Security before their Full Retirement Age (FRA).
In 2023, individuals will be able to earn up to $21,240 per year if they’re under FRA for the full year without forfeiting any benefits. That’s up from $19,560 this year. If their earnings from a job exceed that cap, they lose $1 in benefits for every $2 earned over the $21,240 annual limit. The earnings cap doesn’t apply to pensions, investments or other forms of unearned income.
If you reach Full Retirement Age in 2023, which is 66 and 6 months for people born in 1957, you can earn up to $56,520 in the months leading up to your full retirement age, up from $51,960 this year. If earnings exceed that limit, you forfeit $1 in benefits for every $3 earned over $56,520 next year. But any benefits lost due to excess earnings are not gone forever. You get some of it back in the form of higher monthly benefits when you reach Full Retirement Age.
Employers and employees each pay 7.65% of wages to support Social Security and Medicare. Self-employed individuals pay both the employer and employee share for a combined tax rate of 15.3%.
This year, the 6.2% portion of the payroll tax that funds Social Security applies to the first $147,000 of gross earnings. An 8.7% COLA will increase the maximum taxable wages to $160,200 in 2023. That means workers who earn $160,200 or more next year would pay an extra $1,009.80 in FICA taxes compared to this year.
The Medicare portion of the FICA payroll tax is 1.45% on all earnings, even those above the maximum Social Security tax limit. Plus, individuals with earned income of more than $200,000, or $250,000 for married couples filing jointly, pay an additional 0.9% in Medicare taxes.
In addition to an increase in monthly Social Security benefits, most retirees will pay smaller Medicare Part B premiums next year, resulting in a larger net Social Security benefit. Medicare Part B premiums, which cover doctors’ fees and outpatient services, are usually deducted directly from Social Security benefits.
In 2023, most Medicare beneficiaries will pay $164.90 per month for Medicare Part B premiums, down from $170.10 per month this year. High-income beneficiaries pay more. Medicare surcharges for 2023, officially known as income-related monthly adjustment amount or IRMAA, will range from an extra $65.90 per month to an extra $395.60 per month per person, depending on income.
The income thresholds that trigger IRMAA surcharges will also increase in 2023, to $97,000 for individuals, up from $91,000 this year, and to $194,000 for married couples filing jointly, up from $182,000 this year.