2023 will bring historic changes for retirees on Social Security

(Katie Brockman)

Social Security can go a long way toward making retirement more affordable, but as inflation continues to rise, it is becoming increasingly difficult for fixed-income retirees to make ends meet.

Fortunately, relief could be on the horizon. Next month, the Social Security Administration (SSA) will announce cost of living (COLA) for the year 2023. COLA is an increase in benefits intended to help Social Security maintain its purchasing power.

Annual COLA is normal, and retirees will receive a small increase in benefits most years. However, next year’s adjustment will be historic, and beneficiaries can expect a much greater than average increase.

Image source: Getty Images.

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What will the 2023 COLA agreement be?

We won’t know official COLA until October, as the SSA will wait until September inflation data before making its announcement.

However, the nonprofit organization The Senior Citizens League estimates that COLA for 2023 could be around 8.7%, according to the latest Consumer Price Index (CPI) data from the Bureau of Labor Statistics. This is an increase of about $144 per month for the average retiree.

For context, COLA generally increases by about 1% to 3% most years. This year, recipients received a 5.9% increase, one of the largest increases in recent history. 8.7% COLA would be the highest since 1981.

Other ways this can affect your benefits

COLA’s breaking of records doesn’t just mean an increase in benefits every month. The annual COLA affects many aspects of Social Security, and there are some differences that you might notice in 2023:

  • Maximum benefit amount: In 2022, the maximum you can get from Social Security is $4,194 per month. But because this number changes every year to account for changes in the cost of living, a higher COLA means there will likely be a higher cap on benefits for 2023.
  • Maximum taxable profit increase: If you have not yet retired, the maximum income subject to Social Security taxes is $147,000 per year. This limit also changes annually due to inflation, so it will likely rise after COLA next year. This means that people with higher incomes will be subject to a larger portion of their income to taxes.
  • Maximum profit limit: If you continue to work after claiming Social Security and have not yet reached full retirement age (FRA), your benefits may be reduced if your income exceeds the annual earnings limit. In 2022, that limit was $19,560 per year (assuming you’re still under your financial assessment). But as the value of COLA increases, a higher profit limit comes, which means that you will be able to earn more without facing discounts.
  • Increase the benefits of marriage and divorce: COLA doesn’t only apply to retirement benefits. If you receive other types of Social Security – such as Marital benefitsDivorce benefits or Supplemental Security Income (SSI) – you’ll get a payment in 2023, too.

COLA affects most areas of Social Security, so whether you’re already retired or plan to start claiming benefits soon, expect some changes in 2023.

How to prepare for next year’s COLA

The new COLA won’t take effect until January 2023, and there’s nothing you need to do between now and then. Changes will be made automatically, so you do not need to apply for the increase.

With rising inflation, a higher utility amount can go a long way toward making daily necessities more affordable. Only by understanding all of the ways in which COLA in the coming year will affect your benefits can you ensure that you are as prepared as possible.

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