Expert Advice on Social Security's 8.7% COLA

Retirement Daily asked our Social Security experts to offer their views about the 2023 Social Security and Supplemental Security Income benefits increase of 8.7% for approximately 70 million Americans. Here’s what they had to say:

Brian Vosberg, president, Vosberg Wealth Management

The Social Security Administration just announced that the retirees would see an 8.7% increase in their Social Security Benefits for 2023. This is a well needed increase as inflation is taking its toll on everything from food to the cost of utilities. Social Security has not had a cost of living increase this high since 1981 when it was 11.2%. Many retirees rely of Social Security as their main source of income. Faced with higher prices, these retirees are forced to cut back and even eliminate their spending to make ends meet. This 8.7% increase coupled with a decrease in Medicare Part B premiums will help combat these rising costs.

For those that have not yet started to collect Social Security, you will still benefit from the increase. Not only does your Social Security benefits get the COLA increase, but you can also increase your benefit by delaying your start date. Every year you delay past full retirement age, you get an 8% increase in your benefit up to age 70. Social Security should be the foundation of everyone’s retirement income. A larger Social Security payment comes with tax savings as well. Depending on your overall income, your Social Security income may be tax free. This means that you may not have to pay any taxes on the 8.7% increase next year. Proactive tax planning with a professional can help maximize how much of your Social Security can remain tax free.   

Heather Schreiber, founder, HLS Retirement Consulting

Big and eagerly awaited news this morning as my phone and email has been blowing up. Obviously, this is the largest COLA since 1981 when the COLA was 11.2%. Many Social Security recipients are likely breathing a sigh of relief just in terms of trying to pay for the simple things, like their everyday expenses (groceries, gas, prescriptions, and doctor's visits). As of September 2022, the average monthly income benefit for a retired worker was $1,674; with the 8.7% COLA, the monthly benefit increase, effective in December 2022, will result in a plumper deposit of $1,820, roughly $149 more per month.

A few more positives for consumers to take note of:

Medicare enrollees can expect (Medicare) Part B premiums to actually go down in 2023, from $170.10 in 2022, to $164.90, a decrease of $5.20 per month. The decline, a rarity, is a result of an overestimation of the costs associated with a new Alzheimer's drug called Aduhelm in 2022. The last time Part B premiums took a backslide was in 2012. Generally, they increase which takes a bite out of the cost-of-living adjustment applied to the monthly income benefit. In most cases, Medicare premiums are deducted from a beneficiary's monthly income benefit.

The higher-than-usual 2023 COLA shouldn't send concerned eligible filers to the "file now" line to lock in their claim to the COLA. Anyone age 62 or older, even those who have not yet filed a claim for benefits, is entitled to the cost-of-living adjustment. The COLA will automatically be applied to the worker's primary insurance amount so making a claim decision based on the COLA is a bad idea. In fact, waiting to claim, at least until full retirement age or later, generally makes sense for most. With most people living longer and spending more years in retirement, holding out for a larger eventual Social Security monthly income benefit to which future cost-of-living adjustments will be applied is a strategy worth considering.

Kurt Czarnowski, principal, Czarnowski Consulting

My thoughts this year are the same as they always are each year when the COLA gets announced. Given the changes in the private pension world, people need to recognize the value of the Social Security program as the closest thing to a defined benefit pension that many people have these days. Social Security has remained that bedrock base of financial protection that people can count on being there throughout their lives, even as markets have tumbled and balances in retirement accounts have recently plummeted. Not only can people not outlive their Social Security benefits, but those benefits also come with a guaranteed measure of inflation protection which are designed not to make people wealthier than they were, but to protect the purchasing power of the benefits that they had earned. And, this guaranteed inflation protection is so much more important as people are living longer and longer in retirement. The "security" in Social Security cannot be overlooked, especially in times of high inflation like we are in right now.

Elaine Floyd, director of retirement and life planning, Horsesmouth

If you are planning to delay your Social Security in order to receive the higher amount, and if you are wondering if you should claim now in order to get the COLA…don’t! You will get the COLA. Your primary insurance amount (PIA) was (or will be) calculated in the year you turn 62. After that, it is raised by the annual COLA, whether or not you have started your benefit. You can rest assured that when you eventually claim your Social Security benefit the amount will reflect your original PIA, plus each year’s annual COLA, plus delayed credits after full retirement age, plus adjustments for continued earnings if applicable. The longer you work and the longer you delay Social Security (to age 70), the more you will receive from the system. The COLA is icing on the cake.

Joe Elsasser, president, Covisium

People should consider the COLA in the context of their overall retirement income. Tax brackets will also increase coming into next year, though likely not by as much as Social Security benefits because tax brackets use a slightly different measure of inflation. A larger Social Security benefit, combined with higher amounts that fall into each bracket creates additional opportunities to create tax efficiency by managing the amount of IRA withdrawals relative to Social Security benefits. By blending withdrawals from IRAs with Social Security and other savings, many middle and upper middle-income people can actually avoid tax on their Social Security benefits entirely.

Dave Freitag, financial planning consultant and Social Security expert, MassMutual

Many workers do not realize the importance or capital equivalency of the Social Security COLA-adjusted income streams in retirement. In their press release Fact Sheet of 10-13-22, the Social Security Administration reports that an elderly couple on average received $2,734 a month is 2022. In 2023, that same couple will see an increase to $2,972 or $238 a month more that can be used for things like groceries, gasoline, utility bill payments, and medical prescriptions.

It takes thousands of dollars of new capital to guarantee this COLA-protected income stream for the rest of your life. It is also important to remember that this increase in benefits is not subject to market risk and never goes down. The increase in benefits can only go up in the years to come.

Joseph Stenken, qualified plan counsel at McHenry Advisers

Not only will benefits increase by 8.7% in 2023, but the taxable Social Security Wage Base will increase from $147,000 in 2022 to $160,200, an increase of almost 9%. For high earning self-employed taxpayers, this could result in a tax increase of over $1,600, while high earners who are W-2 employees could see a tax increase of over $800 with a matching increase for their employers.

This increase may lead some to look for ways to spread out or defer income so as to lower this new Social Security tax burden. Owners of small corporations may reduce their W-2 salaries and instead take dividend distributions, which are not subject to Social Security taxation.

Ted Sarenski, wealth manager, SageView Advisory Group

The COLA adjustment for Social Security is made annually since 1975 based on the CPI. This year’s adjustment is the highest since !981 and is the 4^th highest ever since annual COLA began in 1975. The COLA adjustment will certainly help SS recipients catch up with the increased inflation we have experienced, but unfortunately, is a year behind the actual inflation increase experienced since the beginning of 2022 as it will become effective with SS payments received in January 2023.

One item that many people are unaware of is that the COLA adjustment also applies to those who have not begun Social Security benefits. The calculation of what you are to receive when you are Social Security eligible will include the 8.7% COLA adjustment. If you have signed up for mySocial Security and looked at your projected benefit today and then compare it to the projected benefit after the first of the new year you will see the 8.7% increase.

Lita Epstein, author, Complete Idiot's Guide to Social Security

For the first time in 40 years, seniors will truly see a benefit from an increase in the COLA. In most recent years, the COLA increased a small amount and most of it was eaten up by a Medicare increase in the Part B premium. This year seniors will truly see an increase in the COLA and a decrease in Part B premiums. Unfortunately, food and medical costs have gone up as much if not more over the past year for many retirees, so the COLA increase will just help most seniors to stay above water and not see their ability to pay for things deteriorate.

Martha Shedden, co-founder, National Association of Registered Social Security Analysts

It is a historic year for retirees given the size of the COLA and the decrease in the Medicare Part B premium. Those who are contemplating collecting benefits should not rush to start by thinking they will “miss out” on the increase. COLA increases are applied to all workers’ base benefit amounts (the PIAs) starting when they are age 62, whether they have started collecting benefits or not.

Matthew Allen, CEO, Social Security Advisors

Facts:

• The 8.7% COLA adjustment for Social Security recipients is the largest since 1981. In 1981, recipients received an 11.2% increase.
• Since 2000, the annual COLA has averaged 2.3% and in some years (2009 and 2010), the COLA was 0%.
• The announced COLA will increase the payments received in January 2023 and will be done automatically.
• The 8.7% cost-of-living adjustment (COLA) will begin with benefits payable to more than 65 million Social Security beneficiaries in January 2023, but also, all Social Security cost of living (COLA) increases that occur in the year a person turns age 62 or after are added to their Social Security full retirement benefit rate regardless of when they apply for benefits. (Read https://www.ssa.gov/pubs/EN-05-10070.pdf)
• Technically, it the person’s Primary Insurance Amount that is adjusted by the COLA, not their direct benefit amount (Read https://www.ssa.gov/oact/cola/colaapplic.html).
• The annual Maximum Taxable Earnings for Social Security purposes is increasing to $160,200 in 2023.
• The COLA adjustment is also adjusting higher the Social Security Earnings test from $19,560 in 2022 to $21,240 in 2023.
• The average Social Security benefits for all retired workers is increasing from $1,681 to $1,827 in 2023.

Planning Opportunities

Do’s:

• Self-Employed: If you’re a small business owner (especially for S-Corp or C-Corp small business owners), there are some excellent Social Security planning opportunities to strategically and intelligently structure your compensation to utilize the Social Security Administration’s Primary Insurance Amount formula (the formula of how they calculate your benefits) to your advantage to maximize your Social Security while also not paying more than what is needed in payroll taxes. 
• Check Your Earnings History: As always, it’s important to check your earnings history to make sure the amounts on your Social Security statement accurately reflect your work history. If you notice a mistake, get it fixed immediately because there is a statute of limitations of three years, three months, and 15 days (with some exemptions) to correct the error. This is also important because if your Full Retirement Age amount is not accurate, the COLA adjustments for you are not going to be accurate either. 
• Make a Plan: It is critical that you understand your Social Security claiming options and speak with a Social Security Advisor to make sure you are making the best decisions possible when planning when and how to claim your Social Security. This is especially important if you’re married, divorced, or a survivor because you may have eligibility on another record, there are 2,728 rules, and making sure you know which rules apply to you is a necessity when trying to make the right decisions.

Don’ts:

Don’t Rush: Do NOT rush to claim Social Security by the end of the year. If you are 62 and over this year, you will receive the COLA adjustment regardless of whether you have filed or not yet for Social Security. I have seen many people make the mistake of claiming Social Security because they did not properly understand this rule and they thought they had to claim before December 31^st to qualify for the increase; that is not the case. If you find yourself in the position of having made this mistake, you can withdraw your Social Security filing using an SSA 521 Withdrawal of Application (https://www.ssa.gov/forms/ssa-521.pdf). It is recommended that you get professional help from a Social Security Advisor if you need to do this.

Kelly LaVigne, vice president of consumer insights, Allianz Life

Given today’s news about the 8.7% Social Security COLA increase coming next year, it’s understandable that retirees might feel better about their ability to manage rising costs in 2023. However, it’s important to remember that this COLA increase should not be thought of as a “raise,” but rather a necessary adjustment to help ensure that retirees living on a fixed income can keep up with record inflation.

This COLA news underscores the importance of having a solid Social Security strategy as part of your retirement plan. According to our recent Retirement Risk Readiness Study, more near-retirees (40%) and pre-retirees (35%) believe that people will get enough from Social Security to meet their needs in retirement; only 10% of retirees said this is true. If you have a retirement plan, you should have contingencies built in for challenging conditions/volatility like we’re experiencing right now. Miscalculating how much you can depend on Social Security benefits can have a detrimental effect on your financial health throughout retirement.

Katherine Tierney, senior retirement strategist, Edward Jones

This boost in benefits can help retirees better meet their day-to-day needs given rising inflation. It may even enable them to reduce how much they need to withdraw from their investment portfolio, which can be especially beneficial in down markets. How much you withdraw from your investment portfolio each year plays the biggest role in ensuring your money lasts through retirement. And, small adjustments, such as reducing your withdrawals during down markets, can have a meaningful impact on your portfolio's longevity.

Social Security recipients could also put those extra dollars toward their cash reserves. We generally recommend retirees maintain about one year's worth of spending needed from their investment portfolio in cash and up to three months' spending in an emergency fund. We recommend another three to five years' worth of spending needed from their investment portfolio be held in short-term fixed-income investments, which are now offering better income opportunities given multiple interest rate hikes.

While the COLA for 2023 is certainly welcome, retirees probably shouldn't count on future increases being nearly as large as this year’s, as Social Security bases the COLA on the overall rate of inflation (namely the CPI-W index). The recent spike in inflation was exacerbated by a confluence of unusual factors, including pandemic-related government spending, supply shortages and the Russian invasion of Ukraine. As these issues work themselves out, we would expect inflation to subside, leading to smaller COLA bumps in the future.

Donna Clements, manager of Social Security Information Services at Mercer

Millions of Americans – from retirees to those working full-time – will be impacted by the huge 8.7% cost-of-living adjustment (COLA). Here’s how:

• Social Security & Disability Benefit Checks - People counting on their Social Security checks will receive the largest increase since 1981. For the average retired worker, the increase is about $146 a month for a monthly benefit of $1,827.
• Working Retirees -- Also impacted are those working to generate income while receiving Social Security benefits. Currently, those under their full retirement age (66 and 6 months in 2023) who are working full-time can still receive full Social Security so long as their income does not exceed $21,240 in 2023. This enables retirees to earn more before they see a reduction in their benefits. 
• Payroll taxes paid by Employees – The 8.7% COLA also impacts the estimated 175 million working Americans who contribute to Social Security by paying the combined 7.65% payroll tax, matched by their employers, to support these programs. The Social Security taxable earnings base increases to $160,200 in 2023 from $147,000 in 2022.

Make the Most of Social Security – Three Steps:

1. Review your social security statement to make sure you have 35 years of earnings to use in the calculation. If you don’t, zeros will be added for those years to make it up to 35. 
2. View your Social Security benefits statement online at www.socialsecurity.gov/statement to make sure your earnings history is accurate and use this information to plan your future retirement. 
3. Consider delaying your benefits until full retirement age (FRA) – This is age 67 for those born in 1960 or after. At this time you’re entitled to full benefits. And if you wait until up to age 70, the more benefits you will get – an 8% a year increase for each full year (prorated for months).