The cost-of-living-adjustment (COLA) for December 2022 has been announced at 8.7% and has become payable in January 2023. The Social Security Administration has announced its highest-ever increase in decades to counteract the debilitating effect of all-around rising prices o low and moderate-income groups.
This year, like in any other, the COLA has been typically equal to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for a fixed period. The consumer price index is an indicator of the average prices of several goods and is used to accurately measure the rise in inflation.
The COLA fixed by the Social Security Administration for 2023 is 8.7%. that indicates that if a person received $10,000 in Social Security benefits last year, their 2023 amount will increase to $10,870.
Other than the 8.7% increase in benefits in 2023, Social Security recipients will also see the following changes from January this year. The Maximum earnings subject to the SST will rise from $147,000 in 2022 to $160,200 this year.
The maximum earning working recipients who are under full retirement age can earn before a reduction is declared on their benefits. The amount will be $21,240 against the earlier figure in 2022 which was $19,560.
The Maximum Social Security monthly benefit for a worker who retires at full retirement age in 2023 will go up to $3,627 from the earlier $3,345.
The average Social Security benefit that will be paid in 2023 increased from $1,681 in 2022 to $1,827, while disabled workers will also gain from a rise from $1,364 in 2022 to $1,483 in 2023. For now, it takes $1,640 to get a single Social Security credit. It is up from $1,510 in 2022.
The Cost-Of-Living Component In Social Security Payments
Cost of living is the total amount that is needed to take care of basic expenses including food, housing, healthcare, and taxes at a particular place, and during a given period. The cost of living is regularly used to compare how two cities compare in terms of living expenses.
The living expenses, or the cost of living, are linked to wages and salaries. For instance, if New York’s living expenses are high, the wages must also match correspondingly to enable people to live there.
The COLA was initiated as an increase to Social Security and the Supplemental Security Income to counter the effect of rising prices in the economy or inflation. COLA adjustment is normally equal to the percentage increase in the Consumer Price Index for UWE for Clerical Workers (CPI-W) for a fixed period, which is normally a year.
The CPI represents the average price of several goods, usually denoted as a basket of goods, and is a good measure of present inflation. The COLA for 2023 has been set at 8.7%. This steep rate is a result of the relentless rise in the price of goods and services through 2022.
The price of goods and services started in the last quarter of 2021, but it was only in the first quarter of 2022 that it assumed this alarming proportion, regularly staying above the 8.5% mark and even reaching 9.1% in June 2022.
This relentlessly high rate of inflation caused prices of goods to rise at an unprecedented level with every product from gasoline to groceries being affected. This increase also affected the price of services including home rent and utility prices.
Additional Changes In Social Security In 2023
Above the 8.7% benefit increase in 2023, Social Security recipients will also get to enjoy the following additional benefits starting January 2023. The maximum earnings subject to the SST will increase from $147,000 in the previous year to $160,000 in 2023.
Working recipients will get a rise in their maximum earnings under the full age of retirement before benefit reduction. The amount will be increased from $19,560 in 2022 to $21,240 in 2023.
The maximum Social Security monthly payments for a worker who retires at the full age of retirement in 2023 will increase from $3,345 in 2022 to $3,627 in 2023.
Cost of living has been termed as the amount that is needed to at least cover the basic expenses of the mentioned basic expenses. The increase in Social Security cost-of-living-adjustment will benefit Social Security OASDI claimants, people under full retirement plans, and also people retiring in 2023.
The rise in Social Security benefits will also benefit blind candidates and trial work period candidates. Other beneficiaries include aged widows living alone, widowed mothers of two, disabled workers, partners, with one or more children, and all disabled applicants.
Impact Of Inflation On Social Security
The cost-of-living-adjustment by the Social Security Administration is an important and constant reminder that keeping pace with inflation is one of the attributes that makes Social Security benefits such a unique source of income. The other is that the payments continue for the rest of the life of the beneficiaries.
High inflation throws up two major issues that negatively impact the benefits provided by COLA. the first of the issues pertain to Medicare Part B premiums. They are deducted from Social Security benefits automatically.
It is seen that premium costs of Medicare Part B rise at a faster pace than the cost of living adjustments. The other issue is about taxation under the personal income tax act. As the threshold above which income tax is levied is not adjusted for wage growth or even for inflation, rising benefit levels have a negative effect. It means that many social security beneficiaries cross the level and inversely taxation permeates further down the income distribution level.
Medicare premiums for Part B, which is the physician and outpatient services, and also Part D, which is the prescription drugs services, are deducted from Social Security benefits before they get sent to the recipient. Typically, the Medicare Part B premium increases each year in line with Part B per capita expenditures. With rising inflation, the provision prevents dollar declines in net benefits, but beneficiaries still experience erosion in the actual purchasing power of their net benefits.
Thus wage growth and inflation will subject an increased portion of the income distribution to taxation and reduce the net benefit that beneficiaries eventually receive.
