What is the COLA for 2023?

Social Security on Thursday announced an 8.7 percent cost of living adjustment for retirees, the largest inflation adjustment to benefits in four decades — a welcome development for millions of older Americans struggling to keep up with fast-rising living costs.

The cost-of-living adjustment for 2023, which will be applied to benefits in January, is based on the latest government inflation figures. The final COLA, as the adjustment is known, was released after the Labor Department announced the Consumer Price Index for September, which came in at 8.2 percent. Medicare enrollees can anticipate some additional good news: The standard Part B premium, which is typically deducted from Social Security benefits, will decline next year.

The COLA, one of Social Security’s most valuable features, will give a significant boost to about 70 million Americans next year. While retirement comes to mind when most people think about Social Security‌, the program plays a much broader role in providing economic security.

In August, the program paid benefits to 52.5 million people over age 65, but younger beneficiaries — survivors of insured workers and recipients of disability benefits‌ and Supplemental Security Income, the program for very low income people — added 17.9 million people to the total, according to Social Security Administration data.

The annual inflation adjustment has been awarded since 1975 under a formula legislated by Congress. Policy experts have debated whether the current formula accurately measures the inflation that affects retirees, but there’s little disagreement on the COLA’s importance in helping beneficiaries keep up with costs.

The New York Times examined the back story of Social Security’s inflation adjustment — how it works, how it could be revised — and how it affects pocketbooks.

Social Security, the monthly benefit paid to retirees, disabled people and survivors of beneficiaries, includes an annual cost of living increase that is announced every fall. It helps seniors try to keep pace with the price increases that touch every part of the economy. The adjustment for 2023, of 8.7 percent, was announced on Thursday. People can begin claiming Social Security at age 62.

The Social Security Administration, the federal government agency that oversees the benefits, adds that money to payments that are received by more than 70 million people, mostly through electronic direct deposits. The increase takes effect in January.

The current high rate of inflation dictates the Social Security COLA.

The formula uses one of the broadest government measures of consumer prices, the Consumer Price Index for Urban Wage Earners and Clerical Workers‌, or C.P.I.-W.‌

Social Security averages the C.P.I.-W. figures from the third quarter of each year and compares that with the previous year’s figure.

Social Security is Americans’ only universal retirement benefit — nearly all retirees receive it, so interest in the annual adjustment is always high. And the COLA is one of Social Security’s most valuable features because it holds benefits steady against the erosion of rising prices.

Inflation consistently surfaces in surveys as one of the top worries of retirees — and the COLA sets Social Security apart from other retirement benefits. For example, private-sector pension plans generally do not have COLAs, although they are built into most state and local government pension plans.

“And there’s no cap,” said Nancy Altman, president of the advocacy group Social Security Works. “If inflation goes up 20 percent, you get a 20 percent increase.”

Image

No.

Living costs and inflation rates vary considerably around the country, and that means a Social Security check goes farther in some regions than in others. The Elder Index shows that the average benefit covers 90 percent of living costs in rural West Virginia but just 38 percent in San Francisco. (You can run online comparisons of basic living costs around the country using the index.)

Rising housing costs can be a major problem for seniors — especially those who rent. Asking rents rose 12 percent nationally last year, and increases exceeded 20 percent in some regions of the West and South, according to the Joint Center for Housing Studies at Harvard.

“Renters typically have much less control over their housing costs,” said Jennifer Molinsky, senior research associate at the center. “And renters tend to have lower incomes and to rely more on Social Security, which is a concern if cost-of-living adjustments don’t keep up with rising rents.”

Seventy-nine percent of Americans over 65 own their home, the center reports. Although they are more insulated from fast-rising housing costs than renters, rising property taxes and utility costs can be a challenge.

“When we talk to older homeowners, the main thing they mention as pushing them out of their homes and communities are property taxes,” Jan Mutchler, a professor of gerontology at the University of Massachusetts Boston, said.

Yes and no.

The COLA formula is based on a broad measure compiled by the Labor Department known as the C.P.I.-W., which reflects price changes for a group of goods and services bought by working people, not retirees. Inflation affects retirees differently — they tend to spend more on health care and housing and less on food, beverages and transportation.

Policy experts have debated proposals to replace the C.P.I.-W. with an alternate measure that aims to gauge the inflation experienced by seniors more accurately. That one, the C.P.I.-E. (E is for elderly), has sometimes run about two-tenths of a percentage point higher than the C.P.I.-W. — a meaningful difference as it compounds over many years of retirement. However, the C.P.I.-E. would not always yield a higher COLA. For example, the 5.9 percent COLA awarded for 2022 would have been 4.8 percent had C.P.I.-E. been in use, according to data from the Center for Retirement Research at Boston College.

And the difference between the two measures has been shrinking. The C.P.I.-E. has been tracked since 1983, and during its first 20 years, it rose almost 0.4 percentage points per year faster than the C.P.I.-W., according to the center. But in the last 20 years, the gap declined to 0.05 percentage points.

The cost of medical care has been rising at a slower rate. At the same time, transportation costs have been rising more quickly — but this is a category where older people are less affected, since they travel less.

“The difference between the two is really disappearing,” said Alicia Munnell, the center’s director.

Yet another alternate, the chained C.P.I., is often included in Social Security overhaul proposals that would cut benefits — and it has enjoyed bipartisan support in the past. For example, former President Barack Obama proposed using the chained C.P.I. as a component of federal budget negotiations in 2013.

The chained C.P.I. reflects the idea that when prices jump, consumers switch to less expensive items, and it would produce less generous COLAs. The center’s research shows that a chained C.P.I. would annually rise about 0.3 percentage points more slowly than the C.P.I.-W.

“We tend to think of the C.P.I. as measuring the cost of a fixed basket of goods, but the reality is that the basket of goods you buy changes all the time,” said Andrew Biggs, senior fellow at the American Enterprise Institute. “The chained C.P.I. tries to reflect that, and what that tends to show is slightly lower inflation.”

The debate over how to measure the inflation experienced by seniors isn’t just technical — it’s also political, said William Arnone, chief executive of the National Academy of Social Insurance, a nonpartisan group of experts on Social Security and Medicare.

“The public should know that they’re at risk from both sides of the political spectrum when it comes to revising the COLA,” he said. “Some politicians think it is too low, and others think it is too high.”

It’s really not an accurate description.

“People who receive Social Security simply don’t live on fixed incomes,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “They have this wonderful benefit that increases over time when consumer prices rise.”

That doesn’t mean Social Security is adequate to meet the needs of retirees. For example, the Elder Index, which measures the cost of living for older Americans, shows that for a single person who rents a home, the average benefit covered just 68 percent of basic living expenses in 2021 — housing, food, transportation and health care. For a married older couple, the comparable figure was 81 percent.

“Social Security does not and will not cover necessary expenses as long as benefit increases are tagged to the cost of living and nothing more,” said Jan Mutchler, a professor of gerontology at the University of Massachusetts Boston, which created the index.

Census Bureau data released last month showed that the rate of poverty increased among older Americans, despite improvement among all other age groups. The poverty rate among Americans 65 and older rose to 10.3 percent in 2021 from 8.9 percent in 2020. Looked at another way, 5.8 million older Americans were below the federal poverty level in 2021 — a figure that increased by 950,000 last year.

“Those numbers are an alarm bell for a much longer continued trajectory of increases in poverty among older adults that we think is coming,” said Ramsey Alwin, president and chief executive of the National Coalition on Aging. “So many older adults are just extremely fragile financially. They’re one crisis away from really spiraling into financial challenge, and the poverty numbers are telling that story.”

Not if you’re eligible for benefits.

The annual COLA is applied to your benefit amount, even if you have not yet claimed, beginning in the year that you become eligible to claim them (age 62). If you are considering delaying your claim to receive a higher monthly benefit down the road, missing out on COLAs should not be a factor that deters you.

“You certainly should not claim early just to get the COLAs,” Andrew Biggs, senior fellow at the American Enterprise Institute, said.

In most years, no. That’s because most seniors are enrolled in Medicare, and premiums for Part B (which covers outpatient care) typically are deducted from Social Security benefits. But this ‌time will be different.

The ​​COLA that was announced on Thursday is the gross figure, and that is applied to everyone receiving Social Security. But any change in the Part B premium affects the net amount of your increase.

Very often, any dollar increase in the Part B premium reduces a retiree’s ‌COLA. And, in years when the COLA is very small — or the Part B increase is large — the premium can take a significant bite.

But in 2023, the opposite will occur: Seniors can look forward to an increase in the COLA because of the Part B premium. The standard monthly Part B premium will drop by $5.20, to $164.90. (The annual Part B deductible will also ‌decline, by $7‌, to $226.) A lower premium is rare‌; the last time it dropped was in 2012. The decline is the result of the unusual circumstances surrounding Aduhelm, the controversial and very expensive drug for treating Alzheimer’s disease. ‌The ‌Food and Drug Administration approved Aduhelm in June 2021 despite objections from the agency’s own scientific advisory panel.

The drug was initially ‌to cost $56,000 per patient annually — a figure that the drug’s maker, Biogen, later reduced to $28,800.

Since Aduhelm is administered in outpatient settings, the cost would be borne by Part B, not Part D, the prescription drug plan. Medicare officials‌ anticipated Aduhelm costs when ‌they increased the standard ‌Medicare ‌Part B premium for 2022 by 14.5 percent, to $170.10 per month.‌‌ Medicare ultimately decided to sharply limit coverage of Aduhelm ‌but let‌ the large Part B increase stand, citing administrative hurdles to giving enrollees a midyear rebate.‌

“Medicare is reducing premiums for 2023 mainly to account for lower than expected spending on Aduhelm,” said Tricia Neuman, executive director of the Medicare policy program at the Kaiser Family Foundation.

What happens in years where the Part B premium increase is larger than the COLA‌‌?

This can be a problem during times of low inflation‌. During the last decade, there were two years of zero COLAs‌‌ and five other years when the adjustment was less than 2 percent.

Under federal law, the dollar amount of Part B premium increases cannot exceed the dollar amount of the COLA — ‌a “hold harmless” feature that ensures net Social Security benefits do not fall. The math affects people differently, depending on their Social Security benefit amount. In years of low COLAs ‌or high Part B increases‌, people with lower benefit amounts have seen their ‌benefit ‌payments remain flat.

Most seniors’ prescription drugs are covered through Medicare Part D, and that program has not had a cap on the amounts that beneficiaries must pay out of pocket after deductibles are met. That can be a hardship for older people with very high drug costs. In 2020, 1.4 million Part D enrollees spent $2,000 or more out of pocket on drugs, according to the Kaiser Family Foundation.

The climate and health care bill that President Biden signed into law in August aims to start curbing those costs with a series of changes that will start phasing in next year.

In 2023, the Inflation Reduction Act curbs the soaring cost of insulin with a $35 monthly cap for Medicare enrollees. (A cap for privately insured people was stripped out of the final bill at the insistence of Republican lawmakers.) Also starting next year, drug makers will pay penalties for any price increase on a drug that exceeds the rate of general inflation.

The legislation takes a two-stage approach to capping total out-of-pocket costs. In 2024, Medicare’s requirement that enrollees pay 5 percent coinsurance above the Part D “catastrophic threshold” will be eliminated. That will provide important relief to retirees who now pay 5 percent of the cost of very expensive drugs for conditions such as cancer, diabetes, rheumatoid arthritis and atrial fibrillation. And starting in 2025, a $2,000 total out-of-pocket cap takes effect.

The legislation empowers Medicare to start negotiating with drugmakers in 2026 on prices for 10 of the most expensive drugs covered under Part D. In subsequent years, the list will expand to 20 drugs covered under Part D and Part B.

Image

The large COLA, an 8.7 percent increase that begins in January, will push some retirees over income thresholds that require them to pay income taxes on part of their Social Security benefit.

Social Security benefits were first taxed in 1984 as part of an overhaul package aimed at stabilizing the program’s finances. While the federal income tax system generally is indexed for inflation, the income thresholds that determine the taxable amount of Social Security benefits are fixed. As benefits rise over time, a greater number of enrollees have found themselves paying income taxes on part of their benefits.

The formula used to determine the tax is unique. First, you determine a figure that Social Security calls combined income (also sometimes called provisional income). This amount is equal to your adjusted gross income plus tax-exempt interest earned on investments plus 50 percent of your Social Security benefits.

Single filers pay no taxes on benefits if their combined income is equal to or below $25,000; the threshold is $32,000 for joint filers. Beneficiaries in the next tier of income — between $25,000 and $34,000 for single filers and between $32,000 and $44,000 for married couples filing jointly — pay taxes on up to 50 percent of their benefits. Beneficiaries with income above those levels pay taxes on up to 85 percent of benefits. Put another way, 15 percent of your benefit will always be tax-free.

“Since the thresholds are not indexed for inflation, many people who didn’t have any of their benefits taxed are probably going to get to a place where half of their Social Security is taxed,” Alicia Munnell of the Center for Retirement Research said. “And others who pay income tax on half of their benefit now would wind up paying tax on up to 85 percent of their benefit.”

The first automatic annual adjustment to Social Security benefits was paid in 1975, the result of legislation passed by Congress in 1972. Before that, cost-of-living adjustments were awarded periodically by lawmakers, generally in large amounts. For example, there was a 10 percent increase in 1971, a 20 percent increase in 1972 and two increases in 1974 totaling 18 percent.

The 2022 adjustment of 8.7 percent was the fourth-largest since automatic annual adjustments began, behind 9.9 percent in 1979, 11.2 percent in 1981 and 14.3 percent in 1980.

The move to an automatic COLA reflected bipartisan agreement, said Nancy Altman of Social Security Works and a historian of the program.

“Some progressives didn’t like the lag effect, where inflation could be rising but people might wait two years to get an adjustment, and some conservatives didn’t like the politics, where there might be a COLA that was larger than the actual rate of inflation,” she said.

William Arnone of the National Academy of Social Insurance thinks the large COLA for 2023 could become a political issue this fall. “Democrats could try to leverage it, especially with the one-two punch of the Part B premium going down,” he said.

By contrast, he notes that two Republican senators, Ron Johnson of Wisconsin and Rick Scott of Florida, have suggested that Social Security and Medicare should be eliminated as federal entitlement programs and instead should be approved annually by Congress.

“It could be a sleeper issue in the midterm elections,” Mr. Arnone said.

President Biden signaled as much last month when he warned that Republicans posed a threat to Social Security and Medicare, citing the proposals made by the two senators.

Social Security is funded mainly through FICA taxes on wages — currently 12.4 percent split evenly between employers and workers.

In 2022, the tax was collected on the first $147,000 of wages. That amount will rise to $160,200 in 2023.

The $13,200 jump in how much of workers’ wages will be taxed is large compared with past increases. In 2022, the income subject to the tax went up by $4,200, which is about the average rise since 2017.

In 2021, the retirement and disability trust funds collected $1.09 trillion in revenue, and 90.1 percent of that came from FICA contributions. Interest earned on government bonds held by the trust funds provided 6.4 percent, and the remaining 3.5 percent came from income taxes on Social Security benefits.

Yes.

The other adjustments are based on changes in wages, not consumer prices.

Your Social Security benefit amount is tied to your lifetime wage history. That’s because the program aims to replace a certain amount of your preretirement income — about 40 percent for a middle-income worker, according to Social Security Administration data.

To determine your benefit, the Social Security Administration begins with a calculation of what is called your average indexed monthly earnings, or A.I.M.E. This figure takes into account your highest 35 years of wages and then adjusts those earnings to reflect wage growth in the economy over time. Those years are then averaged.

Your A.I.M.E. is applied to a formula that generates what is called the primary insurance amount. The formula is weighted to make benefits progressive — that is, a lower earner receives a benefit that represents a higher percentage of preretirement earnings than a high earner. The primary insurance amount is the sum of three separate percentages or portions of A.I.M.E., usually in the year you turn 62, often referred to as bend points. The result generated by the formula is essentially the amount you will receive at your full retirement age.

Changes in the national wage index also are applied to the maximum amount of wages subjected to the Federal Insurance Contributions Act, or FICA, tax. For 2023, that cap will be $160,200, up from $147,000. The index also is used to adjust the exempt amounts under the “retirement earnings test,” which is applied to people who are receiving benefits before their full retirement age but are still working. Social Security withholds a certain amount of benefits for these workers, which are repaid after they reach their full retirement age.

Image

That’s a possibility, at least in the short term.

Social Security is headed toward a shortfall in revenue needed to meet its projected benefit payments. The year when the combined retirement and disability trust funds will be depleted can change a bit from year to year in the trustees’ forecast issued annually. For example, this year the forecast depletion date is 2035 — one year later than in 2021 because of a faster-than-forecast employment rebound from the Covid-19 downturn, which meant that more people were working and paying FICA taxes.

“I suspect that it will be the other way around next year, since inflation is running much higher than wage growth,” said Paul Van de Water, senior fellow at the Center on Budget and Policy Priorities. That could bring the insolvency projection date a bit closer when the trustees issue their next report, in 2023.

But it’s difficult to know precisely how the forecast will be affected, he added. “We don’t know exactly how much the inflation we’re experiencing now will be offset by wage growth, so it’s difficult to say,” he said.

Unless Congress takes action before the trust funds become insolvent, revenue from current tax receipts would be sufficient to cover just 80 percent of promised benefits. That is, all beneficiaries would shoulder a 20 percent reduction in benefits.

Stephen C. Goss, chief actuary of the Social Security Administration, said that “on balance, this should have a small effect on trust fund financial status.”

The Social Security Administration has announced an 8.7 percent 2023 cost-of-living adjustment for people who receive retirement or disability benefits. The New York Times would like to know what’s on your mind.