What you should know as record 8.7% Social Security COLA goes into effect

As inflation has kept prices high in 2022, Social Security recipients can look forward to a record cost-of-living adjustment in 2023.

“Your Social Security benefits will increase by 8.7% in 2023 due to an increase in the cost of living,”[ads1]; says the Social Security Administration in its annual notices to recipients.

The increase of 8.7% will be the highest in 40 years. It’s also a significant increase from the 5.9% cost-of-living increase recipients saw in 2022.

The increase is “kind of a double-edged sword,” according to Jim Blair, a former Social Security administrator and co-founder and principal consultant at Premier Social Security Consulting, which educates consumer and financial advisers about the benefits of the program.

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“It’s good for people on welfare,” Blair said. “It’s not so good for the economy with inflation.”

Social Security benefit checks will reflect the increase starting in January.

The average retiree benefit will increase by $146 per month, to $1,827 in 2023 from $1,681 in 2022, according to the Social Security Administration.

In addition, standard Medicare Part B premiums will decrease by about 3% next year to $164.90, a decrease of $5.20 from 2022. Medicare Part B covers outpatient medical care including doctor visits.

Monthly Part B premium payments are often deducted directly from Social Security checks. Because of the lower premiums for 2023, beneficiaries are poised to see more of the 8.7% increase in their monthly Social Security checks.

“The good news about these letters is that people are realizing 100% of the 8.7% increase,” said David Freitag, a financial planning consultant and Social Security expert at MassMutual.

“Of course the economy is inflating at a terrible rate, but this represents the value of cost-of-living adjusted Social Security benefits,” Freitag said.

Few other income streams in retirement offer cost-of-living adjustments, he noted.

If you’re wondering how much more you might see in your checks, the personal letter from the Social Security Administration will give you an overview of what to expect.

It includes your new monthly benefit amount for 2023 before deductions.

It will also tell you your monthly premium deduction for Medicare Part B in 2023, as well as Medicare Part D, which covers prescription drugs.

The statement will also show your deduction for voluntary tax withholding.

After these deductions, the bank statement shows how much will be deposited into your bank account in January.

Note that you don’t necessarily need to receive Social Security checks now to take advantage of the record increase in 2023, Blair noted.

“The good news is you don’t have to apply for benefits to receive the cost of living adjustment,” Blair said. “You just have to be 62 or older.”

If your income is above a certain amount, you can pay an addition called an income-related monthly adjustment amount, or IRMAA, on Medicare Parts B and D.

This year, it will be determined by your 2021 tax returns, including your adjusted gross income and tax-free interest income. These two amounts are added together to get your modified adjusted gross income, or MAGI.

In 2023, these IRMAA premiums start if your modified adjusted gross income is $97,000.01 or higher and you filed your tax return as single, head of household, qualifying widow or widower, or married filing separately; or $194,000.01 or higher if you are married and filing jointly.

In particular, just one dollar over can put you in a higher bracket.

“It’s important for everyone to make sure that the amount of adjusted gross income that they use for the IRMAA supplements matches what they provided on their tax return two years ago,” Freitag said.

If the information doesn’t match, you “absolutely have to appeal,” he said.

Because the IRMAA surcharges can be extremely significant, it’s an area to watch for errors, Freitag said.

If your income has decreased since your 2021 tax return, you can complain to IRMAA.

It applies if you have been affected by a life-changing event and your changed adjusted gross income has moved down a bracket or below the lowest amounts in the table.

Qualifying life-changing events, according to the Social Security Administration, include marriage; divorce or annulment; death of a spouse; you or your spouse reduced working hours or stopped working altogether; you or your spouse lost income from property due to a disaster; you or your spouse experienced the termination, termination or reorganization of an employer’s pension plan; or you or your spouse received a settlement from an employer or former employer due to bankruptcy, closure or reorganization.

To report this change, recipients must complete Form SSA-44 with appropriate documentation.

As your Social Security income increases with the 8.7% COLA, it can also push you into a different IRMAA or tax bracket, Freitag noted.

It requires careful monitoring of your income, he said.

Remember that two years in the future you could be exposed to IRMAA problems if you are not careful.

In addition, several of your social security benefits may be subject to income tax. Up to 85% of social security income can be taxed based on a unique formula that also takes other income into account.

It’s a good idea to have taxes withheld from Social Security benefits to avoid tax liability when you file your tax return, according to Marc Kiner, a CPA and co-founder of Premier Social Security Consulting.

“Do it as soon as you can,” Kiner said of filling out the voluntary detainer form.

To better gauge how IRMAA or taxes on benefits may affect you going forward, it can help to consult a tax advisor or CPA who can help identify tax-efficient strategies, Freitag said.