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

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

“Your Social Security benefits will increase by 8.7% in 2023 because of a rise in cost of living,” the Social Security Administration states in the annual statements it is currently sending to beneficiaries.

The 8.7% increase will be the highest in 40 years. It is also a significant bump from the 5.9% cost-of-living increase beneficiaries 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 lead consultant at Premier Social Security Consulting, which educates consumer and financial advisors on the program’s benefits.

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“It’s good for people on Social Security,” 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 go up by $146 per month, to $1,827 in 2023 from $1,681 in 2022, according to the Social Security Administration The average disability benefit will increase by $119 per month, to $1,483 in 2023 from $1,364 in 2022.

What’s more, standard Medicare Part B premiums will go down by about 3% next year to $164.90, a $5.20 decrease from 2022. Medicare Part B covers outpatient medical care including doctors’ visits.

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

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

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

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

What to look for in your Social Security statement

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If you’re wondering how much more you stand to see in your checks, the personalized letter from the Social Security Administration will give you a breakdown of what to expect.

That includes your new 2023 monthly benefit amount before deductions.

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

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

The good news about these letters is people are realizing 100% of the 8.7% lift.

David Freitag

financial planning consultant and Social Security expert at MassMutual

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

Of note, you do not necessarily have to be receiving Social Security checks now to benefit from the record 2023 increase, 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 age 62 or older.”

When you may pay Medicare premium surcharges

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

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

In 2023, those IRMAA premium rates kick in 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 filed jointly.

Notably, just one dollar over could put you in a higher bracket.

“It’s important for everyone to make sure that the amount of adjusted gross income that they’re using for the IRMAA surcharges agrees with what they filed on their tax return two years ago,” Freitag said.

If the information does not match, you “absolutely need to file an appeal,” he said.

Because the IRMAA surcharges can be extremely significant, that is an area to watch for errors, Freitag said.

When to appeal your Medicare surcharges

If your income has gone down since your 2021 tax return, you can appeal your IRMAA.

That goes if you have been affected by a life changing event and your modified 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 your work hours or stopped working altogether; you or your spouse lost income on from property due to a disaster; you or your spouse experienced cessation, 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 that change, beneficiaries need to fill out Form SSA-44 with appropriate documentation.

How higher benefits could cost you

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As your Social Security income goes up with the 8.7% COLA, that may also push your into a different IRMAA or tax bracket, Freitag noted.

That calls for careful monitoring of your income, he said.

Keep in mind that two years in the future you may get exposed to IRMAA issues if you’re not careful.

In addition, more of your Social Security benefits may be subject to income taxes. Up to 85% of Social Security income may be taxed based on a unique formula that also factors in other income.

It is a good idea to have taxes withheld from Social Security benefits in order to avoid a tax liability when you file your income tax returns, 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 withholding request form.

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

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Social Security COLA will be 8.7% in 2023, highest increase in 40 years

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Amid record high inflation, Social Security beneficiaries will get an 8.7% increase to their benefits in 2023, the highest increase in 40 years.

The Social Security Administration announced the change on Thursday. It will result in a benefit increase of more than $140 more per month on average starting in January.

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

The Senior Citizens League, a non-partisan senior group, had estimated last month that the COLA could be 8.7% next year. 

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The confirmed 8.7% bump to benefits tops the 5.9% increase beneficiaries saw in 2022, which at the time was the highest in four decades.

The last time the cost-of-living adjustment was higher was in 1981, when the increase was 11.2%.

Next year’s record increase comes as beneficiaries have struggled with increasing prices this year.

“The COLAs really are about people treading water; they’re not increases in benefits,” said Dan Adcock, director of government relations and policy at the National Committee to Preserve Social Security and Medicare.

“They’re more trying to provide inflation protection so that people can maintain their standard of living,” Adcock said.

How much your Social Security check may be

Beneficiaries can expect to see the 2023 COLA in their benefit checks starting in January.

But starting in December, you may be able to see notices online from the Social Security Administration that state just how much your checks will be next year.

Two factors — Medicare Part B premiums and taxes — may influence the size of your benefit checks.

The standard Medicare Part B premium will be $5.20 lower next year — to $164.90, down from $170.10. Those payments are often deducted directly from Social Security benefit checks.

“That will mean that beneficiaries will be able to keep pretty much all or most of their COLA increase,” Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League, told CNBC.com this week.

That may vary if you have money withheld from your monthly checks for taxes.

To gauge just how much more money you may see next year, take your net Social Security benefit and add in your Medicare premium and multiply that by the 2023 COLA.

“That will give you a good idea what your raise will be,” said Joe Elsasser, an Omaha, Nebraska-based certified financial planner and founder and president of Covisum, a provider of Social Security claiming software.

How the COLA is tied to inflation

The COLA applies to about 70 million Social Security and Supplemental Security Income beneficiaries.

The change is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.

The Social Security Administration calculates the annual COLA by measuring the change in the CPI-W from the third quarter of the preceding year to the third quarter of the current year.

Benefits do not necessarily go up every year. While there was a record 5.8% increase in 2009, the following two years had 0% increases.

“For seniors, because they spend so much on health care, those years were difficult,” Adcock said.

A similar pattern may happen if the economy goes into a recession, according to Johnson.

What the COLA means if you haven’t claimed benefits yet

If you decide to claim Social Security benefits, you will get access to the record-high COLA.

But you will also have access to it if you wait to start your benefit checks at a later date, according to Elsasser.

If you’re 62 now and don’t claim, your benefit is adjusted by every COLA until you do.

The amount of the COLA really should not influence claiming.

Joe Elsasser

CFP and president of Covisum

What’s more, delaying benefits can increase the size of your monthly checks. Experts generally recommend most people wait as long as possible, until age 70, due to the fact that benefits increase 8% per year from your full retirement age (typically 66 or 67) to 70. To be sure, whether that strategy is ideal may vary based on other factors, such as your personal health situation and marital status.

“The amount of the COLA really should not influence claiming,” Elsasser said. “It doesn’t hurt you or help you as far as when you claim, because you’re going to get it either way.”

How a record-high increase may impact Social Security’s funds

Social Security’s trust funds can pay full benefits through 2035, the Social Security Board of Trustees said in June.

At that time, the program will be able to pay 80% of benefits, the board projects.

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The historic high COLA in 2023 could accelerate the depletion of the trust funds to at least one calendar year earlier, according to the Committee for a Responsible Federal Budget.

Higher wages may prompt workers to contribute more payroll taxes into the program, which may help offset that. In 2023, maximum taxable earnings will increase to $160,200, up from $147,000 this year.

What could happen to future benefit increases

While 2023 marks a record high COLA, beneficiaries should be prepared for future years where increases are not as high.

If inflation subsides, the size of COLAs will also go down.

Whether the CPI-W is the best measure for the annual increases is up for debate. Some tout the Consumer Price Index for the Elderly, or CPI-E, as a better measure for the costs seniors pay. Multiple Democratic congressional bills have called for changing the annual increases to that measure.

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How much holiday shoppers plan to spend, and how they can avoid debt

Pedestrians carrying shopping bags wait to cross a street in the SoHo neighborhood of New York on Oct. 24, 2021.

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Most Americans say they don’t intend to spend more than last year this holiday season – yet that doesn’t mean they won’t go into debt.

A survey from CreditCards.com finds the average parent with kids under 18 plans to spend $276 per child on gifts. Meanwhile, the average holiday celebrant with a significant other may spend $251 on gifts for them.

A lot of holiday shoppers aren’t planning on increasing their budgets for this holiday season compared to last year. The survey found that 48% of respondents intend to spend about the same. Meanwhile, 21% said they intend to spend less and 13% said they anticipate spending more. The remaining 9% said they weren’t sure yet.

Those who plan to pare back will start with decorations, followed by entertaining and hosting, gifts and travel, in that order.

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However, despite a desire to keep their spending in check, 41% of respondents indicated they are willing to incur debt this holiday season. That was even higher for those who already have credit card debt, with 60% saying they would be willing to add to their balances.

Ted Rossman, senior industry analyst at CreditCards.com, said there are risks people could still overdo it this year.

“Retail sales are setting records, even in the face of some rather downbeat consumer confidence data,” Rossman said.

Even as many consumers pared back their credit card balances during the pandemic, data from Experian shows the average balance is $5,525, he said. Moreover, more than half of active credit card accounts carry their balances from month to month. And the average credit card interest rate is more than 16%.

This year, inflation could lead to people having less money to spend on other things, which could mean they add to those balances. Meanwhile, the enthusiasm for this year’s holiday season coming out of the pandemic could also inspire people to spend more, Rossman said.

There are some tips to avoid that.

First, even though it may sound early, start holiday shopping now, Rossman advised. Due to supply chain issues, some items may be harder to find this year.

“The longer you wait, the more likely things are going to run out, and I don’t think prices are going to go down,” Rossman said.

Next, set a goal of being creative in trying to keep your budget down. Think of ways to give homemade items, or use unused credit card points or gift cards to fund your purchase.

“Your family doesn’t want you to be in credit card debt, either,” Rossman said. “Try to resist the temptation to overspend on the latest and greatest.”

Finally, avoid deals like buy now, pay later unless you have truly thought through how that debt will fit into your overall budget. While some of those deals offer 0% interest, others do not. Moreover, adding multiple monthly bills by purchasing several items this way can cripple your budget, Rossman said.

“A lot of people don’t even view that as debt, and I think that is a bit of a slippery slope,” Rossman said.

CreditCards.com’s online survey was conducted in mid-October and included 2,485 adults.

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Tool shows how changes could affect you

A Social Security Administration office in San Francisco.

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It’s no secret the funds Social Security uses to pay benefits are running low.

New proposals on Capitol Hill aim to fix the program’s solvency.

Just how dramatic those changes will need to be depends on how soon changes are put through.

Likewise, people who are planning for their retirement now may also want to make adjustments based on unforeseen events that could pop up down the line.

That includes any potential cuts to Social Security retirement benefits.

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“When you’re looking at all these ‘what ifs,’ the adjustments you make now in order to plan for something later are much smaller,” said Joe Elsasser, founder and president of Covisum, a Social Security claiming software company.

To that end, Covisum has developed a calculator to help both consumers and financial advisors gauge just how impactful any Social Security benefit cuts could be to their bottom line in retirement.

To be sure, benefit cuts are not a given.

One year ago on Thursday, the Social Security Administration released projections indicating its trust funds could become depleted in 2035, at which point 79% of promised benefits would be payable.

An official update is expected to be released soon with the agency’s annual trustees report. Meanwhile, other projections have already speculated that the expiration date could be sooner due to economic after effects of the Covid-19 pandemic.

To fix that shortfall, experts generally expect some changes. Benefit cuts are among the possibilities, as well as potential payroll tax increases, or a combination of both.

In 1983, when President Ronald Reagan ushered in the last major Social Security reform to fix the program’s then ailing finances, that included gradually raising the retirement age to 67 and imposing some taxes on benefits for the first time.

The key for anyone who is looking toward claiming Social Security retirement benefits now is not to base the decision on worries of what changes could be coming.

“The temptation may be to act on fear,” Elsasser said. “It’s rarely the best track for financial planning.”

“Having a realistic understanding of the impact, even in a bad case, is better than going in with your eyes closed,” he said.

Covisum’s new calculator helps advisors evaluate Social Security claiming decisions. For many people, that is the cornerstone of their retirement plan, Elsasser said.

The calculator can stress test clients’ plans against benefit cuts and other negative scenarios such as poor market performance or negative health situations to see if their plan would still be ok.

“If it is, then you don’t have to act on fear,” Elsasser said.

If it is not, then adjustments like reducing lifestyle expenses or working longer may be necessary.

There is also a free version of the calculator available to consumers.

That version requires four data points: year of birth, benefit amount at full retirement age, percentage of a hypothetical benefit cut and the year that cut occurs.

Then it compares results of a person’s lifespan in five-year increments based on how early they claim — from age 62 or as late as 70 — and how that would be impacted if benefit reductions are put in place or not.

Ultimately, the results can be a starting point for people to evaluate what the potential results could be, which will hopefully lead them to avoid claiming early — and therefore take reduced benefits for life — just because they are afraid of benefit cuts, Elsasser said.

Research indicates those cuts would likely be less than 25%, if they happen at all, he said.

Notably, the calculator does not factor in the idea that benefits could go to zero. Because current tax revenues still support the program, that’s a highly unlikely scenario, Elsasser said. Even younger generations should continue to see income from the program in the future.

“The likelihood of it going to zero is as close to zero as you can get,” Elsasser said.

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U.S experiments with guaranteed income

New York City housing advocates and tenants march to demand Gov. Andrew Cuomo cancel rent amid the pandemic on Oct. 10, 2020.

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The new federal coronavirus relief bill that’s poised to be approved on Capitol Hill could put unprecedented sums of money into the hands of American families.

That includes new stimulus checks of up to $1,400 for adults and their dependents, as well as up to $300 per month per child through an enhanced child tax credit.

This week, some Democratic senators upped the ante, and called for recurring stimulus checks and indefinite expansion of unemployment benefits for the duration of the pandemic.

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To some experts, the move shows the idea of guaranteed income, where a certain floor of money is provided to a targeted set of people, could be gaining momentum in the U.S.

The idea of direct checks to Americans has become more popular. Former Democratic presidential candidate Andrew Yang brought national attention to the concept when he proposed direct payments to individuals on the debate stage in 2019.

Around that time, cities like Jackson, Mississippi, and Stockton, California, started running tests to see exactly how these kinds of programs could work.

Now, even more places are embracing the concept, with 42 cities having signed on to Mayors for a Guaranteed Income, a program that helps them to follow Stockton’s lead and run their own pilots.

Those developments come as the coronavirus has further exposed the economy’s flaws, particularly with regard to income inequality, according to Amy Castro Baker, assistant professor at the University of Pennsylvania’s School of Social Policy and Practice. She is also working as a co-principal investigator of the Stockton Economic Empowerment Demonstration, or SEED.

“It has pulled the curtain back on the fact that most communities and most households, especially working-class households, have not recovered from the wealth loss of the Great Recession,” Baker said.

Now, the pandemic has exacerbated that situation for a lot of individuals and families. The Pew Research Center recently found that 1 in 10 Americans say they will never recover from the current crisis.

“Something is broken,” Baker said.

‘Give families the support that they need’

Aisha Nyandoro, founder of Magnolia Mother’s Trust

D’Artagnan Winford

Springboard to Opportunities, a Jackson, Mississippi-based organization that helps connect families who live in affordable housing to resources to help improve their lives, has witnessed the devastation Covid-19 has brought on the community.

“It’s going to take years, if not a generation, for families to get back to that foothold that they had,” said Aisha Nyandoro, CEO of Springboard.

Nyandoro is also the founder of Magnolia’s Mother’s Trust, a program that provides African-American mothers who are living in extreme poverty in the city with $1,000 per month for a year.

In 2018, the trust ran its first one-year program with 20 mothers. Magnolia finished its second round of $1,000 payments to 110 mothers last month. Now, the program is preparing to launch a third program for about 100 mothers.

Preliminary research shows the program has helped 40% of participants to avoid borrowing money. Meanwhile, 27% were more likely to go a doctor when necessary and 20% were more likely to have children performing above their grade levels in school.

“You can trust Black moms to do what is they need for their families,” Nyandoro said of the results. “We don’t have to have all of these layers of bureaucracy in order to just give families the support that they need.”

$500 per month as a ‘financial vaccine’

Michael Tubbs, former mayor of Stockton, California.

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This week, Stockton’s SEED program also released the preliminary results from its program, which started in 2019. It gave 125 of the city’s residents $500 per month for 24 months.

The results showed that program participants were twice as likely to find full-time work compared to people who were not part of it. Furthermore, participants also said they were better able to handle emergency expenses and saw improvements in their physical and mental health.

The money was mostly used for food, sales and merchandise such as home goods or clothes, utilities and car costs, according to the data. Alcohol and tobacco represented less than 1% of the spending.

“What stuck out to me was how right we were when we talked about how no $500 would replace work, but allow people who choose to do so to work more stable jobs,” said Michael Tubbs, founder of Mayors for a Guaranteed Income and former mayor of Stockton.

The data released this week show the effects of the first year of the program. Full results due in 2022 will show how the program impacted participants during the pandemic.

“We know that the $500 acted as a financial vaccine for folks who received it,” Tubbs said.

“I’m sure their outcomes during Covid-19 will be far better, sadly, than folks who weren’t able to be part of the program.”

Guaranteed income vs. universal basic income

A sign supporting Democratic presidential candidate Andrew Yang’s plan for a $1,000 monthly universal basic income at a May 14, 2019, rally in New York.

Drew Angerer | Getty Images

Both Nyandoro and Tubbs hope to see the concept of guaranteed income embraced on a federal level.

To be sure, these kinds of policies have attracted fierce criticism as well as support.

Baker remembers how people told her she was crazy when she first started working with the Stockton project.

“I was told I was risking my career as a researcher,” Baker said. “The amount of pushback we got was unlike anything I’ve ever experienced in my career.”

Now, the pandemic has only shed light on the urgent need for these kinds of programs, Baker said.

Mayors are acting first because they don’t have the luxury of time, she said. But there could be bipartisan interest in providing more aid to families on the federal level.

Yet it’s still unclear whether that would be in the form of guaranteed income or universal basic income, according to Baker.

Universal basic income, whereby everyone receives a certain amount of money, has its share of critics.

One of the problems is that the support based for universal basic income is divided, said Daron Acemoglu, institute professor at Massachusetts Institute of Technology’s department of economics.

Some want substantial universal basic income on top of the government aid programs that already exist. Meanwhile, others want to eliminate those benefits in favor of flat payments to everyone.

“That inconsistency, I think, is dangerous,” Acemoglu said.

To date, the experiments taking place in the U.S. are guaranteed income. The advantages of those is that they are targeted, and therefore cost less.

“The world has changed,” Acemoglu said. “We haven’t updated our safety net, fiscal policy.”

Before a national policy is adopted, more testing should be done, he said.

“I think we need a lot more knowledge about what works, what will be effective, what will help poor families most effectively, so experimentation is great,” Acemoglu said.

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