The Social Security Administration announced Thursday that retirement benefits will increase by 8.7% in 2023, the largest cost-of-living adjustment in 42 years.
Social Security benefits increase automatically when the consumer price index (CPI-W), which measures price inflation for urban workers, increases in the third quarter (July, August, and September) of the current year over the corresponding third quarter of the previous year.
Over the past 10 years, benefits have averaged a meager annual increase of 1.8%, and in 2016, there was no COLA at all. But inflation began heating up last year, boosting the COLA for 2022 to 5.9%, which was the biggest annual increase in 40 years. Reflecting continuing inflationary pressures throughout this year, the newly announced 8.7% COLA for 2023 is the biggest annual increase since Social Security benefits increased 11.2% in 1981.
The 8.7% COLA would boost the average monthly Social Security retirement benefit to $1,827 in 2023, up $146 per month from this year’s $1,681 average monthly benefit. The 8.7% COLA would also increase the maximum retirement benefit, currently $3,345 per month, to $3,627 per month for someone who retires at the full retirement age in 2023.
But it's not necessary to actually claim Social Security benefits in 2023 to cash in on the huge annual increase. Anyone who's 62 or older and eligible to receive Social Security in 2023 will profit from the 8.7% COLA. The 2023 cost-of-living adjustment, along with every other COLA awarded from the time individuals turn 62 until they file for benefits, will be automatically included in their future Social Security benefits.
Mary Johnson, a Social Security and Medicare analyst for The Senior Citizens League, noted that a COLA exceeding 8% is extremely rare. “There were only three other times since the start of automatic adjustments in 1975 that it was higher,” Johnson said.
Social Security benefits increased by 9.9% in 1979, 14.3% in 1980 and 11.2% in 1981. You can find a history of the COLA here: https://www.ssa.gov/oact/cola/colaseries.html.
The 8.7% COLA for 2023 also affects how much beneficiaries can earn from a job without jeopardizing any of their benefits if they claim Social Security before their full retirement age.
In 2023, individuals will be able to earn up to $21,240 per year if they're under full retirement age for the full year without forfeiting any benefits. That’s up from $19,560 this year. If their earnings from a job exceed that cap, they would lose $1 in benefits for every $2 earned over the $21,240 annual limit. The earnings cap doesn't apply to pensions, investments or other forms of unearned income.
In the year someone reaches full retirement age, there's a more generous earnings cap. In 2023, they could earn up to $56,520 in the months leading up to their full retirement age, up from $51,960 this year. If their earnings exceed that limit, they will forfeit $1 in benefits for every $3 earned over $56,520 next year.
The full retirement age increases to 66 and 6 months next year for people who were born in 1957. Any benefits lost due to excess earnings are not gone forever. They are restored in the form of higher monthly benefits at full retirement age.
Employers and employees each pay 7.65% of wages to support Social Security and Medicare. Self-employed individuals pay both the employer and employee share for a combined tax rate of 15.3%.
This year, the 6.2% portion of the payroll tax that funds Social Security applies to the first $147,000 of gross earnings. An 8.7% COLA will increase the maximum taxable wages to $160,200 in 2023. That means workers who earn $160,200 or more next year would pay an extra $1,009.80 in FICA taxes compared to this year.
The Medicare portion of the FICA payroll tax is 1.45% on all earnings, even those above the maximum Social Security tax limit. Plus, individuals with earned income of more than $200,000, or $250,000 for married couples filing jointly, pay an additional 0.9% in Medicare taxes.
In addition to an increase in monthly Social Security benefits, most retirees will pay smaller Medicare Part B premiums next year, resulting in a larger net Social Security benefit. Medicare Part B premiums, which cover doctors’ fees and outpatient services, are usually deducted directly from Social Security benefits.
In 2023, most Medicare beneficiaries will pay $164.90 per month for Medicare Part B premiums, down from $170.10 per month this year. High-income beneficiaries pay more. Medicare surcharges for 2023, officially known as income-related monthly adjustment amount or IRMAA, will range from an extra $65.90 per month to an extra $395.60 per month per person, depending on income.
The income thresholds that trigger IRMAA surcharges will also increase in 2023, to $97,000 for individuals, up from $91,000 this year, and to $194,000 for married couples filing jointly, up from $182,000 this year.
(Questions about new Social Security rules? Find the answers in Mary Beth Franklin’s 2022 ebook at MaximizingSocialSecurityBenefits.com.)
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