On Thursday, the Social Security Administration revealed that benefits will increase by 8.7% in 2023, the highest increase since 1981 when double-digit inflation pushed payouts up by 11%. The cost-of-living adjustment (COLA) impacts 70 million Americans, including 48 million retired employees and their wives and dependents, as well as beneficiaries of disability and survivor benefits and Supplemental Security Income. In 2023, the average monthly increase will go from $1,688 to $1,827, an increase of $142.
The 2023 Cost-of-Living Adjustment (COLA) is based on the increase in the Consumer Price Index for Urban Wage Earners (CPI-W) between the third quarters of 2021 and 2022, which means it looks backward at inflation; it was finalized this morning when the Bureau of Labor Statistics released September’s inflation rate. The significant boost, along with a 2023 decrease in Medicare costs (the first premium cut since 2012), would allow seniors who rely on Social Security to recover much of the ground lost to inflation over the previous year. In 2022, the increase in benefits was 5.9%, but the increase in Medicare Part B premiums caused seniors to lose a portion of it.
The Social Security Administration (SSA) announced today that the maximum wage amount subject to Social Security tax (also known as the wage base) will increase from $147,000 in 2022 to $160,200 in 2023. This adjustment, which will result in increased taxes for around 6 percent of workers, is based on changes in the national average pay index and not the CPI. The Social Security tax rate set by Congress remains fixed at 12.4%, with the employee and employer each paying half and the self-employed paying 12.4% alone. Therefore, the maximum Social Security tax per worker will increase by $1,637, from $18,228 to $19,865, with $9,932.50 deducted straight from each employee’s salary, an increase from $9,114 this year.
Next year, though, it is possible that high-paid employees may not be the only ones complaining about Social Security and taxes. This is because the inflation adjustment might also provide an unwelcome surprise to moderate-income seniors, pushing them into the zone where part (or all) of their Social Security payments become subject to federal income tax.
Depending on a beneficiary’s family income, the federal government has taxed up to 85 percent of a recipient’s payments since 1984. For a single with a “combined income” between $25,000 and $34,000 and a married couple with a “combined income” between $32,000 and $44,000, taxes on up to 50% of Social Security payments are phased in. Over these thresholds, up to 85 percent of benefits are taxed.
In contrast to other elements of the tax system, phase-in levels are not updated for inflation; more than 55% of recipients now pay federal income tax on a portion of their benefits, compared to 8% in 1984. (What is the aggregate income? Approximately half of your Social Security payments, your other gross income as adjusted, and any ordinarily tax-exempt interest. This section has more explanation.)
In 2023, the maximum payout for a worker claiming Social Security at “full” retirement age will increase from $3,345 in 2022 to $3,627. This maximum, however, increases and decreases based on the age at which a worker begins receiving retirement benefits. For a person born in 1957, the complete retirement age is 66 and six months. Their benefits will increase by 28% if they wait until age 70 before claiming them. (The so-called delayed retirement credit amounts to two-thirds of 1% per month for each month of delay, or 8% per year. There is no advantage to waiting past the age of 70.)
Significantly, individuals deferring payments will not miss out on the advantages of this year’s large COLA. As Social Security expert Larry Kotlikoff explains, the annual COLA increases a recipient’s “primary insurance amount” (i.e., the amount they’d receive if they claimed benefits at full retirement age). Then, when they do file a claim, the primary insurance amount is multiplied by the delayed retirement credit, and the COLA-augmented amount is applied.
Another important statistic published today is the restriction on earned income for semi-retirees who have previously filed for Social Security retirement benefits but have not yet attained the full retirement age. You are eligible for reduced benefits at age 62, even though the full retirement age for people born between 1943 and 1954 and after 1960 is 66. Those born in 1960 who file for benefits at age 62 (this year) are subject to a 30% reduction in their primary insurance payment.
The wage cap may be especially relevant this year; older employees’ labor force participation rate dropped early in the Covid-19 epidemic. However, more retirees have returned to work recently due to inflation, economic concerns, and (according to polls) a need to have something to do. (The earnings restriction applies solely to earnings from employment, including wages and net earnings from self-employment, and not to profits from investments or a private pension.)
In 2023, most persons receiving Social Security benefits early will have their payments reduced by $1 for every $2 earned beyond $21,240 per year or $1,770 per month. In 2022, the average salary was $19,560, or $1,630 per month. When they reach full retirement age in 2023, they will have a more lenient earnings cap: earnings beyond the cap will result in a loss of $1 in benefits for every $3 earned. In 2022, the cap for people who have reached full retirement age is $51,960.
Social Security recalculates your benefits to account for any lost benefits upon reaching full retirement age. Senior Citizens League policy analyst Mary Johnson praised the cost-of-living adjustment (COLA) hike while noting that the increased payments might push back the predicted date of 2034 when the Social Security Old Age and Survivors Trust Fund will run out. At that time, according to the Social Security Trustees, the yearly tax income flowing into the program will only be sufficient to cover 77% of payments, necessitating a repair before then. She warned that the prognosis for the Trust Fund might worsen if unemployment increases during a recession.
Automatic Social Security COLAs have been in effect since 1975 when Congress opted to remove itself — and the politics of the day — from the eagerly anticipated adjustment. According to the graph below, the growth in 2023 will rank as the fourth-greatest increase since then.
The Social Security Administration (SSA) states that beneficiaries will get notified of their new individual benefit levels for 2023 in early December but that this information may be obtained sooner by establishing a personal online account. Social Security beneficiaries will notice the rise in their January checks, while more than 7 million SSI users will begin to see the increase on December 30, 2022.