Higher Colas Are a Bad Thing For the Middle-Class Retiree

Higher inflation is predicted to enhance the Social Security cost-of-living adjustment, or COLA, in 2023 by a percentage not seen in forty years. This might be interpreted as good news for seniors struggling with rising expenses. The poor part? This substantial increase might drive Social Security users into higher tax categories, resulting in almost half of all households paying taxes on their payments.

In October, the Social Security Administration will release the real COLA for 2023. The predicted change, however, will increase the average Social Security retirement payout of $1,656 by $144.10, according to the Senior Citizens League.
Mary Johnson, Social Security and Medicare policy analyst for the Senior Citizens League, stated, “The taxes are onerous.” Important income is being taxed away, and it may be cumbersome and have major effects on people’s ability to access their housing and food resources, affecting their health.

Consider that your income is between $25,000 and $34,000. You file a tax return as an individual and may be required to pay income tax on up to 50% of your benefits. If your annual income exceeds $34,000, the proportion jumps to 85%.
For couples filing jointly with income between $32,000 and $44,000, up to 50% of your benefits may be subject to income tax, increasing to 85% if your joint income exceeds $44,000. These are the same income thresholds as when the U.S. government started taxing Social Security payments in 1984.

No adjustment has been made to these thresholds for inflation, so almost half of the beneficiaries will now pay taxes on their benefits, according to Johnson. According to the Social Security Administration, in 1984, the tax was 10%, and today it is more.
If the income criteria had been updated for inflation and factored into the Bureau of Labor Statistics’ calculator, the $25,000/single filer and $32,000/married filing jointly levels would be around $72,662 and $93,008, respectively, said Johnson.
It is no longer fair. It does not function well for senior taxpayers, said Johnson. People may not yet be planning ahead for tax filing, but they should. The cost-sharing for Medicare Part B premiums is likewise affected by the COLA. However, the income level is greater at $91,000 for individuals and $182,000 for couples.

Andrew Biggs, the senior scholar at the American Enterprise Institute, suggested that the income level for taxation of Social Security benefits was purposefully held unchanged so that more individuals would ultimately pay taxes on half of their payments.
Some individuals will be offended. But the income levels are not adjusted, so people can be phased in gradually. The intention was that, over time, individuals would pay income taxes on fifty percent of their benefits, and Biggs said that it is because they did not pay taxes on the employer contribution.

Biggs stated that the COLA hike would not result in greater taxes for those with the lowest incomes. Those who require the COLA rise the most, the lower half of the population, receive substantial protection against inflation, said, Biggs. Retirees with higher incomes are protected, and it becomes more difficult for those with a middle income, Biggs added.