For the 66 million people receiving monthly Social Security checks, the announcement of an 8.7% raise is a welcome buffer against persistent inflation. Now financial advisors and advocates for the elderly are warning of its effect on individual taxes, Medicare and Medicaid.
The Social Security Administration said Oct. 13 that its annual cost-of-living adjustment, or COLA, for 2023 would increase the current average monthly benefit of $1,656 by nearly $145. The boost came the same day that new data showed consumer prices rose 8.2% for the year through September, above economists' expectations.
Beneficiaries are dealing with the fastest price increases for food, gas and other consumer goods in four decades as the economy emerges from the pandemic will have more money to spend — and now, potentially larger tax bills.
That's because Social Security payments are subject to federal taxation if, when combined with other sources of income, they exceed certain thresholds. Individual filers whose
Connor Spiro, a senior financial consultant at Boston-based John Hancock Advice, said that unlike Social Security benefits, those thresholds are not adjusted annually. That means every time there is an increase in the monthly payment, beneficiaries move one step closer to being in taxable territory. And this year's especially large COLA will most likely push even more than usual over the line.
"People who are at that borderline, they are probably living mostly off their Social Security," Spiro said. "For them, this becomes priority No. 1."
Spiro said the ways to avoid a tax hit will vary widely according to a person's financial situation and age.
Besides the increase in payments, the increase — the highest since 1981 — is good because it's nudging people to think about their retirement, said Nathan Voris, the director of investments, insights and consultant services at Schwab Retirement Plan Services, a large 401(k) provider.
"This increase is in the headlines and people are talking about it," he said. "Our hope and belief is that it will drive engagement and more people will call us."
On another front, Medicare Part B premiums and deductible rates, which pays for doctors' services and outpatient care, will go down next year. The Part B premium will decrease by $5.20 a month in 2023 to $164.90 and the annual deductible to $226 from $233. The change is unusual, Spiro said, because in most prior years, Medicare premiums have increased alongside Social Security benefits. The unusual fall in premiums and deductibles next year most likely means retirees will have to set aside a smaller portion of theirSocial Security payments for medical expenses.
Still, some Medicare recipients will face higher costs with the Social Security increase. Their premiums will rise by a so-called income-related monthly adjustment if they make over certain amounts. For single filers who make more than $97,000 a year, or joint filers making more than $194,000, the monthly increase is $65.90
Low-income Medicaid recipients could be in an even worse bind. Income-eligibility requirements for Medicaid and related assistance programs, which vary widely from state to state, could be tripped by higher monthly Social Security checks.
In a recent survey, the Senior Citizens League, an advocacy group for the elderly, found that 38% of its respondents who had received low-income assistance in 2021 saw their benefits reduced in 2022 as a result of that year's 5.9% Social Security adjustment.
Some16% reported that because their income was right on the borderline, they lost access to one or more low-income programs altogether, the Senior Citizens League said in a statement.
Such considerations are not likely to concern the majority of Social Security recipients or those who use financial planners. For them, Spiro said, the biggest thing is to not get used to such large increases..
The last time the Social Security Administration approved a change greater than the one now in line for next year was in 1981, when the adjustment was 11.2%. With adjustments tied to inflation, which the Federal Reserve is struggling to tame through a series of interest rate increases, the chances are very unlikely that the next annual boost will be anywhere nearly as big as the one for 2023.
"So although this COLA is obviously helpful now, and it's going to give you some breathing room, we expect a revision to norms or even below that in following years," Spiro said.
The Senior Citizen League goes farther. If the country were to enter a recession next year, as many economists have predicted, consumer prices could begin to fall, leading to a smaller Social Security adjustment – or none at all
According to the group: "An abrupt turn to deflation could mean that there may be no COLA payable in 2024."
