It marks the biggest bump in 40 years.
An estimated 65 million Americans are on social security right now, and many of them are struggling just to make ends meet amid rising living costs, but luckily, some much-needed relief’s on the way. The Social Security Administration announced on Thursday the largest inflation adjustment to benefits in four decades.
The federal agency, which oversees benefits, said the new cost-of-living adjustment, or COLA, will be increased from 5.9 percent in 2022 to 8.7 percent starting in 2023. That translates into an increase of about $144 each month, boosting the typical benefit from $1,658 to about $1,802 each month.
But just how historic is this bump? There are only two other times when social security recipients received bigger COLAs — the first in 1980 when benefits got a 14.3 percent hike and then in 1979, when benefits rose by 9.9 percent.
“Since this is the biggest increase since the late 1970s, it’s unlikely that many people have been receiving social security throughout that entire period of time,” Bankrate senior economic analyst Mark Hamrick tells KCM. “So for the broadest part of this population, this is going to be the biggest increase they’ve ever seen.”
Here’s a breakdown of what this adjustment means and why Medicare enrollees can anticipate some additional good news.
What’s the cost-of-living adjustment?
A cost-of-living pay adjustment essentially refers to an increase in income based on an estimate of how much money is needed to maintain a certain standard of living to keep up with inflation, which is still staying red hot at around 8.2 percent.
Though the adjustment has now become the Social Security Administration’s ritual every fall, it wasn’t always that way — before a 1970s law making these benefit increases instant, the agency had to wait for Congress to authorize the increase. This in turn meant that sometimes several years would lapse before Social Security beneficiaries saw their boost — and this didn’t just affect seniors. After all, the social security program also functions as a form of broader economic security for an estimated 9 million disabled workers and their dependents, as well as 6 million widows, widowers, and children.
But then again inflation hasn’t been this high in decades, and certain groups on these benefits are struggling more than others. Compared to 45 percent of men, an estimated 54 percent of older women living alone are living below federal poverty standards or are unable to afford basic necessities like food, according to data from a little-known living cost measure known as the Elder Index.
When will the bigger COLA payments start?
The Social Security Administration will automatically add the 8.7 percent increase to monthly payments — most of which are sent out via electronic deposits — starting in January 2023. But Hamrick tells us that some Americans — such as those who are disabled — could receive their cut as early as December 30.
In terms of specific timing, it just depends on what day your birthday falls on — for instance, those born from the 1st to the 10th of the month can expect their first check with the new adjusted increase to land on January 11, according to CBS News.
How much of an increase to expect
If you’re wondering how much you can expect to receive, the Social Security Administration recommends taking your monthly payment and multiplying it by 8.7 percent. From there, you can add this number to the amount you were receiving in 2022, which will show you the new total you can expect to receive in 2023.
Plus, many seniors can expect some extra cash on hand, thanks to Medicare Part B premiums, which are automatically deducted from social security benefits, dropping next year by about 3 percent. This follows the Biden administration’s decision to narrow coverage of a controversial Alzheimer’s treatment that drove up increases in 2022. But this drop in prices could put some over the edge when it comes to their income thresholds and lead to taxes on Social Security benefits. As it currently stands, single filers who have a combined income equal to or below $25,000 don’t have to pay any taxes on their benefits, and for joint filers, this threshold is $32,000.
Will this adjusted increase make up for inflation?
Though this increase intends to compensate for inflation, it’s unclear if it’ll actually be enough for everyone on social security, particularly those 62 years old and above. The formula used by the Social Security Administration relies on a little-used inflation measure known as the Consumer Price Index for Urban Wage Earners and Clerical Workers or CPI-W, which only takes into account around 29 percent of the U.S. population.
This index also isn’t specifically pegged to older Americans and their price pressures. For example, the CPI-W tends to put more emphasis on things like transportation costs rather than medical-related expenditures. That’s why Democratic Rep. John Larson is pushing for a bill known as The Social Security 2100 Act that would expand benefits and help seniors who spend more on health care.
But Hamrick worries that changing the way social security is currently calculated could be difficult in a thinly divided Congress that could shift again after November’s midterm elections. “The reality is there’s a pattern that’s been fixed on this for some time and changing that it would be fraught politically,” he says.
Do bigger payouts mean smaller ones in the future?
While a year of big increases won’t be a total drain on the Social Security system by itself, Hamrick warns it will further strain the agency’s finances. The latest annual trustees report for Social Security said its funds that pay out retirement and disability benefits will be able to pay scheduled benefits as usual until about 2035, and after that, incoming cash from taxes will be enough to pay 80 percent of scheduled benefits.
“A potential downside of the large COLA increase is that it raises the risk that funding is further depleted for future Social Security benefits,” Hamrick tells KCM. “That’s aside from the potentially damaging impacts on funding from a rise in unemployment, which is widely expected.”