Social Security cost-of-living adjustment will be 8.7% in 2023, highest increase in 40 years

An independent seniors’ group, the Senior Citizens League, predicted that the COLA for Social Security retirement payments in 2023 could be 8.7 percent. The increase would be the biggest in almost 40 years.

“A COLA of 8.7 percent is exceedingly exceptional and would be the highest ever earned by most Social Security pensioners alive today”, the SCL said in a press brief. Since implementing the first set of automated adjustments in 19791981, only three previous times saw a higher value.

The estimate is based on the most recent data from the Bureau of Labor Statistics CPI-W, issued in September.

Each COLA is calculated according to a formula detailed in the Social Security Act. To account for inflation, this formula for cost-of-living adjustments (COLAs) uses the Consumer Price Index for Urban Wage Earners and Clerical Workers as its base (CPI-W). 

A COLA that takes effect in December of a given year is equal to the percentage rise (if any) in the average CPI-W for the third quarter of that year over the average for the third quarter of the year preceding the one in which a COLA took effect. The Social Security Administration (SSA) shall round any increment to the nearest tenth percent. If there is no rise or the increase rounded down to zero, there will be no cost-of-living adjustment (COLA).

How is the distinction between the CSRS COLA and the FERS COLA made?

The COLA for the Civil Service Retirement System (CSRS) and Federal Employees Retirement System (FERS) are determined differently.

The CSRS COLA is based on the CPI-W, published by the Bureau of Labor Statistics (BLS).

The CPI-W increase from the current year’s third quarter to the previous year’s third quarter is used to calculate the COLA. If there is an increase, the COLA is applied to the annuities of CSRS retirees. FERS COLA, on the other hand, is based on the Consumer Price Index for Urban Consumers

(CPI-U) is also published by the BLS. The COLA for FERS is calculated as the percentage increase in the CPI-U from the current year’s third quarter to the previous year’s third quarter. If there is an increase, the COLA is applied to the annuities of FERS retirees.

It’s worth mentioning that both CSRS and FERS COLAs are subject to a “hold harmless” provision, which means that the COLA cannot cause a retiree’s annuity to decrease. Therefore, if the COLA causes a decrease in a retiree’s annuity, the COLA will not be applied that year. Additionally, both CSRS and FERS COLA are capped at 2% annually. Therefore, if the calculated increase is higher than 2%, it will be capped at that amount; this is done to avoid significant and sudden increases in retirement benefits.

Comparing the FERS COLA to the CSRS COLA is seen in the following table:

The cost of Medicare Part B premiums could stay about the same in 2023.

According to the SCL, Medicare Part B premiums might not increase significantly in 2023. In their 2022 annual report, the Medicare Trustees projected that the regular Part B premium in 2023 would stay at $170.10 per month, the same as in 2022. The Medicare Part B premium and associated charges are typically disclosed around mid-November.

The Impact of the Social Security COLA on Medicare Costs

Some higher-income earners may have to pay extra for Medicare Part B (medical insurance) and Part D (prescription drug coverage) benefits due to an 8.7% Social Security COLA for 2023.

While Part B and Part D rates are based on an income-related monthly adjustment amount adjusted for inflation, a married couple filing tax jointly who earns just a few dollars more than one of Medicare’s income criteria may see significant premium increases.

According to Kotlikoff, your Medicare costs could increase by $800, $900, or $1,000 [per month] if you earn an extra dollar or two in Social Security benefits.

According to Mary Johnson, a Social Security policy expert for the Senior Citizens League, with an impending significant Social Security COLA, it’s essential to investigate how much taxes you might owe.

Johnson advises all Social Security recipients to sign into their My Social Security accounts and then talk to a qualified financial advisor about their income tax withholding.

According to Johnson, you will need to modify your projected taxes if you anticipate that your taxable income will be 10%

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