The Social Security Administration (SSA) announced today that approximately 70 million Social Security and Supplemental Security Income (SSI) recipients would see a cost-of-living adjustment (COLA) of 8.7% for 2023. This is the largest increase since 1981 when the COLA was 11.2% and a significant increase from last year’s 5.9% COLA. The recent large Social Security COLAS are not normal. In the decade before 2021, benefits averaged an increase of just 1.7%.
8.7%
The 2023 Social Security cost-of-living adjustment means a $146 per month bump in benefits to the average recipient
As in the past, SSI recipients will begin receiving their first increase on December 30, 2022. Regular Social Security beneficiaries will get their first check in January 2023; the timing depends on your birth date.3 Your individual Social Security COLA notice will be available online in the Message Center of your my Social Security account in December. You may also receive your notice by regular mail.
This year’s increase is not exactly a surprise, given record-setting inflation as reflected by the Consumer Price Index (CPI) throughout 2022. CPI, a monthly measure of changes in the prices consumers pay for a market basket of goods, is used to calculate the SS and SSI COLA every year.
Just-released data from the Bureau of Labor Statistics (BLS) note a 0.4% rise in the Consumer Price Index for All Urban Consumers (CPI-U) in September on a seasonally adjusted basis. Before adjustment, the all-items index increased 8.2% YOY in September.
The Role of Inflation
The steep rise in the Social Security COLA this year means inflation in the previous year also saw a significant rise. That’s because the Social Security COLA is derived from—and tied to—an increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), another signpost of inflation.
More specifically, the difference between the CPI-W for the third quarter of the previous year and the third quarter of the current year is both the inflation rate and the COLA for the upcoming year. By way of illustration, the difference between the CPI-W for Q3 2021 and that of Q3 2022, is 8.7%, which becomes the COLA for Social Security recipients for 2023.
Medicare Part B and Part A Costs for 2023
In a turnaround from last year, 2023 Medicare Part B premiums, announced on September 27, 2022, will see a modest decrease. Most Part B beneficiaries will pay $164.90 in 2023, down $5.20 from $170.10 in 2022. This is important because Medicare premiums are typically deducted from Social Security benefits, something that would have eroded the impact of the COLA if those premiums had risen.
Although most people do not pay a premium for Medicare Part A, hospital coverage, they are subject to deductibles and coinsurance payments. The Part A deductible for 2023 will be $1,600, up $44 from 2022. There are increases in Part A co-insurance as well. The amount for the 61st through 90th day of hospitalization, for example, will be $400 per day, up $11 from the 2022 rate. Additional Medicare cost increases also apply.
Additional Social Security Changes for 2023
On top of the 8.7% benefit increase for 2023, Social Security recipients will see the following additional changes beginning in January 2023:
- Maximum earnings subject to the Social Security tax will increase to $160,200 from $147,000 in 2022.
- Maximum earnings working recipients under full retirement age can earn before a reduction in benefits will be $21,240 vs. $19,560 in 2022.
- Maximum Social Security monthly benefit for a worker retiring at full retirement age in 2023 will increase from $3,345 to $3,627.
- The average Social Security benefit paid in 2023 increases to $1,827 from $1,681 last year.
- Disabled workers will also see a rise from $1,364 per month to $1,483.
- It now takes $1,640 to earn a single Social Security credit, up $130 from 2022.
Things That Will Stay the Same
- Social Security tax rates remain the same for 2023: 6.2% on employees, and 12.4% on self-employed individuals.
- Individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly) will continue to pay an additional 0.9% in Medicare taxes.
The Bottom Line
The Social Security COLA was never designed to offer beneficiaries a raise. It was (and is) designed to compensate, to a degree, for the increase in the cost of goods and services over the previous year. Since it does not account for future price increases or increases in the cost of related government programs, such as Medicare, it is not a perfect system.
The increase in monthly benefits will be welcomed by millions of recipients. Without the increase, inflation acts as a pay cut. This year’s added bonus is the decrease in Medicare Part B premiums. The combination of that, plus the COLA, will do even more to help those on SS and SSI to maintain their standard of living.