Social Security benefits are expected to jump next year. Here's why.
Social Security recipients will see a major increase in their monthly benefits in 2023 as the federal safety net races to keep up with high inflation.
Inflation determines the cost of living adjustment, or COLA, which is meant to help individuals keep up with the rising cost of basic goods and services as prices on everything including food, energy and housing have skyrocketed over the past year.
The benefits increase in 2023 will be the largest such raise in 40 years. Here's everything you need to know about the Social Security COLA:
When will the next Social Security COLA be announced?
Thursday, Oct. 13.
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How much is the Social Security increase expected to be in 2023?
Social Security's COLA for 2023 will be the largest such increase since 1981. Recent increases in the consumer price index suggest that monthly benefits checks to grow by about $140 for retired workers, $70 for spouses of retired workers, $113 for those receiving survivors' benefits and $115 for disabled workers.
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When does the Social Security cost-of-living increase take effect?
The increases will take effect at the end of December. Though the new amounts are effective for 2023, the first Social Security payment of each year is technically due Jan. 1, which is a federal holiday. The Social Security Administration instead makes the first payments before the new year.
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How is the Social Security COLA calculated?
The COLA is set by price inflation in the third quarter of each year. Inflation is commonly measured by the consumer price index, a basket of basic goods and services that government economists track each month. As prices go up, so does the CPI.
On Thursday, the Bureau of Labor Statistics will publish the CPI for the third quarter of 2022, giving policymakers and benefit recipients the COLA figure for 2023.
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Who is eligible for Social Security COLA?
Individuals ages 62 and older can receive Social Security benefits based on their earnings records. Disabled individuals and those who are blind also qualify. Family members of eligible individuals can also draw Social Security benefits. Check your eligibility here.
Anyone who draws Social Security benefits will get a cost of living adjustment to their credits. The purpose of the increase is to offset the rising cost of consumer goods and services, so don't expect to have leftover money at the end of each month.
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How does the Social Security cost-of-living adjustment impact taxes?
Tax experts say one of the largest misconceptions about Social Security is that it is not subject to taxes. But Social Security, like other government benefits, is taxable. Here's how it works:
Single filers making $25,000 or less, or couples making $32,000 or less pay no taxes on their Social Security benefits.
Single filers making between $25,000 and $34,000, and couples making between $32,000 and $44,000, pay taxes on up to 50 percent of their benefits.
Single and joint filers making above those thresholds pay taxes on up to 85 percent of their benefits.
An easy way to remember this: 15 percent of Social Security benefits - roughly $3,200 in 2023 - will always be tax-free.
A number of recipients who are already near certain levels of income - including any wages, interest from certain investments, plus Social Security - may get pushed into higher tax thresholds because of the COLA increase.
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Does COLA increase future Social Security benefits?
Yes, it does. Social Security COLA increases are compounded, meaning that the adjustment in 2024 will come on top of the 2023 amounts, 2025's will come on top of 2024's, and so on. Social Security benefits also do not shrink year-over-year. Sometimes they are very small - for example, in 2015 there was no COLA increase, and in 2020 the increase was just 1.3 percent - but those small amounts build on each preceding year.
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How will the increase in benefits affect the long-term stability of the program?
It's counterintuitive, but higher inflation is actually good for the Social Security Trust Fund, said Monique Morrissey, an economist at the left-leaning Economic Policy Institute.
The fund will only be able to pay about 80 percent of promised benefits by 2034, the Social Security Administration reported in its 2022 update. That's because there are more retirees receiving assistance - baby boomers are reaching retirement age and living longer than previous generations - and not enough workers paying into the fund to cover them.
When prices rise while the number of Social Security recipients and the benefits paid to them increase, it would seem like a bad thing for the trust fund. But the opposite is true, Morrissey said, because one of the main drivers of inflation is rising wages. Since wages and COLAs are increasing, more money is taxable, both from payroll taxes and some of the increased Social Security benefits.
"Generally speaking, the actuaries will say it's a wash," Morrissey said, "but to the extent that it has an impact, it's a positive one."