Social Security Cost of Living Adjustment (COLA) Announced for 2023
With inflation still growing and everyday costs of food, goods, energy, and healthcare continuing to rise, it was a relief for some to find out about 2023 Social Security benefits and the cost-of-living adjustment (COLA) for them. The Social Security Administration announced this week that benefits will get an 8.7% increase. On average, this will be at least an $140 “raise” per month for people in the New Year. The announcement also included a small decrease for Medicare Part B premiums which many people were happy to find out to help save a few bucks in 2023.
How does this COLA compare to the past? As financial planners, we project an average increase for Social Security of 1.5% each year. Over the last 10 years it has averaged 2.24% (last year’s 10-year average was 1.6% for context). 2022 and 2023 increases have become outliers when looking at historical data and skewed the average increase. Why is that? A lot of it has to do with the big buzzword that has been hitting the headlines for over a year now: inflation. 2023’s COLA will top last year’s 5.9% and will now be the highest increase since 1982. This reiterates people’s concern that it’s a direct reflection of Social Security’s inability to keep up with everyday expenses. Food prices are up 10.8% and medical costs close to 6.5% over the past year. Those on a fixed income will need to continue to rely on their savings more and more to fill these increasing gaps.
The bigger questions continue to be around the future solvency of Social Security, and strategies if one is not yet collecting. Here are a few additional thoughts:
- If you’re not collecting, it still “pays to wait” because there are still credits (annual increases) to the tune of ~8%, no matter what the COLA is for 2023. One can collect as early as age 62 and as late as age 70, ranging from 70% of your full retirement age benefit to as high as 132% if you wait until age 70. Hence, each year you wait is roughly an 8% increase, regardless of the COLA. The two are different, but often confused for each other.
- We are often asked if our country’s debt will mean Social Security will sooner or later fold. Social Security is funded by payroll taxes. So, while solvency continues to be the long-term question, it goes back to the number of workers paying into the system vs. the number of retirees collecting. Solvency is more about demographics than our country’s debt. There are only 2.8 workers for each beneficiary right now. For context it was 8.6 to 1 in 1955, when some of those starting to collect today were born.
- The Board of Trustees have been talking about insolvency for years, which some say will be 2034. More pessimistic projections show it could be sooner especially if there are changes to payroll taxes and higher than projected unemployment numbers. The reality is our government will most likely need to make amendments to the full retirement age and taxes with a greater impact on future generations.
Social Security decisions are incredibly important and can often be complicated. If you’re already collecting, the news this week is a welcome increase to your benefits starting in 2023. If you’re not yet collecting, we’d be more than happy to be a resource for you before you make that significant decision.
Tracking # T004623