If inflation offers seniors a silver lining, here it is: Social Security benefits will increase by 8.7% next year. This boost amounts to the biggest increase in four decades. Read on to learn more about the benefits increase, plus more good news about Medicare and VA benefits.
When Will Social Security Benefits Increase?
Social Security recipients will receive the increase in January. The adjustment will help more than 52 million seniors, as well as nearly 18 million younger beneficiaries receiving disability benefits, Supplemental Security Income (SSI), or Social Security benefits as a surviving spouse.
Why Are Benefits Increasing So Much?
The federal government pegs Social Security’s annual cost-of-living adjustment (COLA) to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Because of inflation, the CPI-W rose by 8.2% in September.
The COLA bump is the fourth-largest increase since automatic inflation adjustments began in 1975. It follows last year’s rise of 5.9%, which arguably did little for seniors facing rampant inflation.
Will Medicare Premiums Cut into the Benefits Increase?
In past years, the answer to that question has been “yes.” Rising Part B premiums eroded the impact of cost-of-living increases for Social Security. However, this year, Social Security beneficiaries get a reprieve.
Part B premiums will slightly decrease—dropping $5.20 to $164.90. The annual deductible also will fall by $7 to $226.
The adjustment is due to lower-than-expected costs for Aduhelm, a drug to treat Alzheimer’s disease.
How Does the COLA Increase Affect Taxes?
Some Social Security recipients will end up paying more taxes on their benefits. This is because the income thresholds governing the taxation of benefits haven’t been adjusted since 1984. So increasing COLAs push some seniors into higher thresholds.
Here’s how it works:
No taxes if combined income* is at or below $25,000 (single filers) or $32,000 (joint filers)
Up to 50 percent of benefits are taxed for combined income of $25,000-$34,000 (single filers) or $32,000-$44,000 (joint filers)
Up to 85% of benefits are taxed for combined income above $34,000 (single filers) or $44,000 (joint filers)
*Combined income is considered adjusted gross income and half of a recipient’s Social Security benefits.
What About VA Benefits?
Veterans Affairs won’t finalize rates until December. However, adjustments to VA benefits and pensions are also based on the CPI-W index. So beneficiaries are expected to see an 8.7% increase too.
Final Thoughts
Year-end is a great time to examine your cash flow. With inflation’s rise, you may want to adjust your expense estimates. And, of course, you can calculate your Social Security benefits for 2023 and plan accordingly.
Our fee-only wealth management firm in Plantation, Florida, helps clients evaluate cash flow needs as part of their ongoing financial planning. Schedule a complimentary consultation with one of our fee-only financial planners to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.