Changes to the Social Security Cost of Living Adjustment (COLA) in 2023
What is a cost of living adjustment?
The United States Social Security Association (SSA) calculates an annual Cost of Living Adjustment (COLA) to mitigate the effect of inflation on recipients’ benefits. This is important for retirees who rely on these fixed benefits to maintain their lifestyle as inflation reduces the purchasing power of the benefit. To reduce the effects of inflation, the adjustment will increase when inflation rises and will decrease when inflation declines. Since 1975, the COLA has ranged from 0% all the way up to 14.3% in 1980. Once determined, the COLA is added to the individual’s monthly benefit. For example, someone who collects $2,000 monthly would now collect $2,080 if there was a 4% COLA.
What is the 2023 COLA?
On October 13, 2022, Social Security announced that there would be an 8.7% COLA in 2023. This marks the highest COLA in over 30 years. 2023 COLA will apply to both Social Security and Supplemental Security Income (SSI). Over 65 million Social Security recipients will experience the change in January 2023. While more than 7 million SSI recipients will receive their increased benefit starting December 30, 2022.
On average, 2023 Social Security benefits will increase by more than $140 per month which equates to $1,680 per year. This significant increase can be attributed to the high inflation experienced throughout 2022. Although, according to the Acting Commissioner of Social Security, Dr. Kilolo Kijakazi, this will provide additional “peace of mind and breathing room” to seniors in 2023. Not only is COLA set to increase their retirement benefits, but Medicare premiums are decreasing which will further reduce the burden of inflation on retirees.
How is the cola Calculated?
The Social Security Act provides the formula for determining the annual COLA. The adjustment is based on the changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the prior year. If there is an increase in the CPI-W then the COLA will increase. If there is a decrease in the CPI-W then there will be no COLA for the next year.
The calculation uses the percentage increase (if any) in the CPI-W from the average for the third quarter of the current year to the average for the third quarter of the prior year. The increases must be rounded to the nearest tenth of one percent. In 2021, the values for CPI-W in July, August, and September were 267.789, 268.387, and 269.086 for an average of 268.421. While in 2022, the values for CPI-W were 292.219, 291.629, and 291.854 for an average of 291.901. The averages are then used in the formula to arrive at the 2023 COLA amount.
(291.901 - 268.421) / 268.421 x 100 = 8.7%
What caused the COLA increase?
The 2023 COLA is the largest adjustment since 1981. To no one’s surprise, the reported Consumer Price Index in July 2022 was the largest yearly increase since 1981. To combat these inflationary issues, the Fed has raised interest rates throughout the year to tighten the money supply. As of November 2022, inflation has started to subside in the short-term with no clear long-term direction yet. The Fed has reiterated its goal to get inflation back to the 2% benchmark which means the COLA should not remain at these elevated levels for long. The overall success of the Fed’s actions can be evaluated in October 2023 when the next COLA is announced.
Other changes to social security in 2023
There are additional changes to Social Security other than the COLA in 2023. First, the maximum amount of earnings subject to Social Security tax is set to increase from $147,000 in 2022 to $160,200 in 2023. This will require those who earn over $147,000 per year to pay additional Social Security taxes in 2023.
The earnings limit for workers under full-retirement age will increase from $19,560 in 2022 to $21,240 in 2023. This impacts individuals who collect their Social Security benefit before the full-retirement age of 67 for anyone born after 1960. These individuals can collect Social Security and continue working if they earn less than $21,240 per year. If you surpass the maximum, then your benefit is decreased by $1 for every $2 you earn over the maximum.
The earnings limit for workers who will reach their full-retirement age in 2023 will increase from $51,960 in 2022 to $56,520. Individuals who exceed the maximum will be subject to a $1 deduction in their benefit for every $3 earned over the maximum until the month the worker turns their full-retirement age. Anyone that collects their benefit at or after full-retirement age is not subject to an earnings limit.
The maximum Social Security benefit for an individual collecting at full retirement age has increased from $3,345 per month in 2022 to $3,627 per month in 2023. This increase came with increases in disability benefits as well. Disabled, Non-Blind individuals can receive up to $1,470, while Blind individuals can receive up to $2,460. Another increase that benefits anyone disabled is an increase in the Trial Work Period (TWP) to $1,050 per month which means if capable, the individual can make up to that amount without impeding their Social Security benefit.
If you would like to investigate the additional changes to Social Security in 2023 then I would recommend you follow the link to the SSA 2023 Fact Sheet.