Based on Wednesday’s Consumer Price Index report from the U.S. Bureau of Labor Statistics, which showed inflation in June surging 9.1% from the previous year, the COLA for 2023 will be about 10.5%, according to the Senior Citizens League, a non-partisan seniors advocacy group. If that happens, it will be the first time the COLA has reached double digits since it hit 11.2% in 1982, according to the Social Security Administration. This year’s COLA of 5.9% is the highest since 1981.As recently as last year the COLA was only 1.3%. Mary Johnson, the Senior Citizens League’s Social Security and Medicare policy analyst stated that “If inflation runs “hot”, or higher than the recent average, the 2023 COLA could be 11.4%”. And that would be the second-highest COLA since the Social Security Administration began implementing cost-of-living adjustments in 1975.
The highest COLA ever was 14.3% in 1981. On the other hand, if inflation runs “cold,” or lower than the recent average, next year’s COLA could be 9.8%. A lot of how this plays out depends on how efforts by the Federal Reserve to ease inflation through interest-rate hikes end up panning out. The Fed has already raised rates three times this year, including a hike of 75 basis points in June, the first such move since 1994. Now there is speculation that the central bank will issue another 75-point hike this month during the Fed meeting on Tuesday and Wednesday this week. The current quarter’s inflation rate will have a lot to say about how big a bump Social Security recipients get in 2023. As previously reported by GOBankingRates, the COLA is calculated by using the average rate of inflation in the third quarter of the year. When those figures come out, the data for July, August and September will be added together and divided by three to get the average. The 2022 number will then be compared with the third quarter average of 2021 to determine the percentage of change for 2023.“
A high COLA will be eagerly anticipated to address an ongoing shortfall in benefits that Social Security beneficiaries are experiencing in 2022 because inflation is higher than their 5.9% COLA. Not everyone is happy about the way the Social Security COLA is determined, partly because it is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, which doesn’t account for increases in the Medicare Part B premium. Meanwhile, a big boost in next year’s COLA could have negative tax consequences unless lawmakers change the income thresholds for Social Security beneficiaries. A 10.5% COLA would increase the average retiree benefit of $1,668 by $175.10, according to the Senior Citizens League. Higher incomes often lead to cuts in income-related benefits for low-income people as well as higher taxes for those with incomes above $25,000 for individuals and $32,000 for married couples.
The Senior Citizens League believes tens of thousands of retirees who have not paid taxes on their benefits in the past may discover they must start doing so in 2023. Because the income thresholds are not adjusted like ordinary tax brackets, these once-in-a-lifetime COLA increases could lead to permanently higher taxes for many retirees. Higher incomes also can lead to a loss of income-adjusted Medicare health and prescription drug benefits for low-income beneficiaries.