The Social Security Administration announced today that benefits will jump 8.7% for 2023, the largest increase since 1981, when double digit inflation pushed payments up more than 11%. The cost-of-living adjustment (COLA) affects 70 million Americans, including 48 million retired workers and their spouses and dependents; those receiving disability and survivors benefits; and recipients of Supplemental Security Income. The average retired worker will receive $1,827 a month in 2023, up $146 from $1,681 this year.
The 2023 COLA is based on the increase in the Consumer Price Index for Urban Wage Earners (CPI-W) between the third quarter of 2021 and the third quarter of 2022—meaning it looks backwards at inflation and was sealed this morning when the Bureau of Labor Statistics reported September’s inflation rate. The large increase, combined with a 2023 drop in Medicare premiums (the first premium decline since 2012), means seniors who rely on Social Security will be able to make up most of the ground they’ve lost to inflation over the past year. In 2022, benefits went up 5.9%, but retirees lost a chunk of that to a 14.5% increase in Medicare Part B premiums.
The SSA also announced today that the maximum amount of earnings subject to Social Security tax (also known as the wage base) will rise 9% in 2023 to $160,200, up from $147,000 in 2022. That adjustment, which will mean higher taxes for about 6% of workers, is based on changes in the national average wage index, not the CPI. The Congressionally set Social Security tax rate itself is unchanged at 12.4%, with the worker and and the employer each paying half of that and the self-employed paying the full 12.4% themselves. So the maximum Social Security tax per worker will be rising $1,637 from $18,228 to $19,865—with $9932.50 of that taken directly out of an employee’s paycheck, up from $9,114 this year.
High paid workers, however, may not be the only ones grumbling about Social Security and taxes next year. That’s because the inflation adjustment could deliver an unpleasant surprise to moderate income retirees, too, pushing them into the territory where some (or more) of their Social Security benefits are subject to the federal income tax.
Since 1984, up to 85% of a recipient’s benefits have been subject to federal tax, depending on a beneficiary’s household income. Taxes on up to 50% of Social Security benefits phase in for a single with “combined income” between $25,000 and $34,000 and for a couple with combined income between $32,000 and $44,000. Above those levels, taxes on up to 85% of benefits phase in. Those phase in thresholds, unlike many other parts of the tax code, aren’t indexed for inflation; as a result, more than 55% of recipients now pay federal income tax on some of their benefits, up from 8% back in 1984. (What’s combined income? Roughly, it’s one half of your Social Security benefits, plus your other adjusted gross income, plus any normally tax exempt interest. There’s more of an explanation here.)
The maximum benefit for a single claiming Social Security at “full” retirement age in 2023 will be $3,627, up from maximum of $3,345 in 2022. But that maximum goes up and down depending on the age at which a worker claims retirement benefits. For example, for someone born on 1957, the full retirement age is 66 and 6 months. If they wait until 70 to claim, their benefits will grow by 28%. (The so-called delayed retirement credit equals two thirds of 1% a month for each month of delay—that is, 8% a year. There’s no advantage to waiting beyond 70.)
Significantly, those delaying benefits won’t lose out on the benefits of this year’s big COLA. As Social Security expert Larry Kotlikoff explains here, each year’s COLA boosts a recipient’s “primary insurance amount” (that is, what they’d receive if they claimed benefits at full retirement age). Then, when they do claim benefits, the higher, COLA-fattened primary insurance amount is multiplied by the delayed retirement credit.
Another key number announced today is the earned income limit for semi-retirees who haven’t yet reached full retirement age, but have already claimed Social Security retirement benefits. You can claim reduced benefits at age 62, even though full retirement age is 66 for those born from 1943 to 1954, and rises two months a year until it hits 67 for those born in 1960 or later. Those born in 1960 who claim benefits at age 62 (meaning this year), take a 30% cut to their primary insurance amount.
The earnings limit may be particularly significant this year; the labor force participation rate of older workers fell early in the Covid-19 pandemic, but more “retirees” have been returning to work recently as a result of inflation, economic worries and (they say in surveys), a desire to have something to do. (The earnings limit applies only to earnings from work—wages and net earnings form self-employment—not to what you might earn from investments or a private pension.)
In 2023, most of those receiving Social Security early will be docked $1 in benefits for every $2 in earnings above $21,240 a year or $1,770 a month. That’s up from $19,560 ($1,630 a month) in 2022. Those who actually reach full retirement age in 2023 have a more generous earnings limit: they will be able to earn up to $56,520 in the months before they reach full retirement age and will only lose $1 in benefits for each $3 earned above the limit. That’s up from $51,960 in 2022.
Note that this “loss” in benefits for earning too much is usually only a temporary one, because Social Security recalculates your benefits when you reach full retirement age to account for any benefits you lost before that magic date.
While hailing the COLA increase, Mary Johnson, a policy analyst at The Senior Citizens League, pointed out the higher benefits could move forward the date at which the Social Security Old Age and Survivors’ Trust Fund is exhausted—now estimated at 2034. At that point, the Social Security Trustees figure, the annual tax revenue coming into the program will be enough to pay only 77% of benefits, meaning some sort of fix is needed before then. If unemployment spikes during a recession, that could also worsen the Trust Fund outlook, she noted.
Automatic Social Security COLAs have been in place since 1975, when Congress decided to take itself—and the politics of the day—out of the keenly awaited adjustment. As the chart below shows, the 2023 increase will be the fourth largest since then.
The SSA says recipients will get notices in the mail in early December of their new individual 2023 benefits amounts, but can get that information sooner by setting up an individual online account. Social Security recipients will see the increase in their January benefit checks, while more than 7 million SSI recipients will see it beginning on December 30, 2022.