As a leading advocacy group for the elderly predicts a historically high Social Security cost-of-living adjustment for 2023, some are warning of undesirable tax implications.
The Senior Citizens League released a report Sept. 13 predicting the Social Security COLA for 2023 will be 8.7%. If that proves accurate when the Social Security Administration announces its official COLA in mid-October, it would raise the current average monthly benefit of $1,656 by $144.10. It would also mark the largest adjustment seen in four decades.
Such an increase would no doubt be welcome to many retirees and other benefit recipients who have had to make do with the often-anemic adjustments of recent years. Kyle Newell, owner of Newell Wealth Management, in Winter Garden, Florida, said Social Security COLAs have tended to be negligible for about the past decade.
"So I think this will be a pleasant surprise for people to see a substantial bump in their benefits," he said.
But an increase in Social Security benefits might also subject more incomes to federal taxes. If individual filers now make a
With next year's COLA likely to be large, many more people could find themselves pushed into taxable territory. Mary Johnson, Social Security and Medicare policy analyst at the Senior Citizens League, said preliminary results from one of the organization's recent surveys suggest many Social Security recipients are feeling new anxiety about the tax implications of the coming COLA. Of the 626 people who have responded so far, 21% have expressed worries that they could owe federal income taxes on their Social Security benefits for the first time in 2023.
Johnson cautioned that the League needs to do more surveying before reaching any conclusions. Still, the preliminary results are a strong sign that tax-related anxieties are more widespread than in the past.
"It's definitely on the radar," Johnson said.
Jason Hamilton, founder of Keep It Simple Financial Planning in Orange, California, said he believes the increase in benefits will outweigh any additional tax liability. But for people who are worried about owing the IRS a bit more, there are steps that can be taken.
For people who are old enough to retire but not old enough to enroll in Medicare, there's the option of enrolling in a high-deductible health care plan. That would allow them, if they're married, to put as much as $8,300 a year into a health savings account — money that would not be part of their taxable income.
For people who are 65 or older and are enrolled in Medicare but are still working a part-time job, there's also the option of putting as much as $7,000 a year into a traditional IRA. That, too, would be deducted from their taxable income.
"This is what we call a marginal tax trap," Hamilton said. "You pay nothing, nothing, nothing and then you hit a certain income amount and you're getting taxed."
Johnson's projection for the 2023 Social Security COLA follows the federal government's release on Sept. 13 of inflation data for August. The COLA is based on the U.S. Labor Department's Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.
Johnson noted that the Social Security Administration bases its actual COLA on CPI-W data for three months: July, August and September. That means a drop in inflation in September could still cause the COLA to come in below her current projection.
If the adjustment were to come in at 8.7%, that would mark a modern-day high following the initial institution of COLAs in 1975. Since then, the Social Security Administration has approved COLAs exceeding 8.7% only in a few previous years: 1979 (9.9%), 1980 (14.3%) and 1981 (11.2%). The adjustment for 2022 was 5.9%.
Johnson said she has seen some signs that inflation may be moderating. Gas prices have been falling and Labor Day sales were a more common sight in 2022 than in the previous two years.
Still, she said, "I wouldn't say inflation is licked.
"Just because we see prices coming down in the third quarter, that happened last year in a highly inflationary year," Johnson said. "It was a steady march upward until June, and then suddenly prices moderated a bit in July, August and September."
