Social Security: What to Know About the Upcoming Cost-of-Living Adjustment

By Nicole Young on November 14, 2022

The Social Security Administration (SSA) announced that benefits will receive an 8.7% bump in 2023 to account for rising costs—the most significant cost-of-living adjustment in the last 40-plus years of the program. This adjustment should provide some relief for Americans who have felt their budgets squeezed by high inflation and their savings decimated by stock market volatility. 

On the surface, an increase of this magnitude may seem like a cause for celebration, but not every recipient of Social Security will be impacted in the same way by these changes. Let’s discuss a handful of the different angles that bear consideration. 

What changes are being made and why?

The vast majority of American seniors count on Social Security benefits for some portion of their retirement income, and in 2022, roughly 66 million people received a check each month. Given how large the program looms in the lives of so many taxpayers, the Social Security Administration releases updates to it on an annual basis in order to keep up with shifting economic conditions. 

One of the principal drivers behind these adjustments is the cost of living in the United States, which has skyrocketed lately as a result of decades-high inflation that’s persisted for over a year. Soaring energy and food costs, in particular, continue to put pressure on American households as they look to meet their day-to-day needs. The Consumer Price Index, or CPI—often used as an inflation gauge because it measures the relative rise or fall of prices for everyday goods and services—shows that prices have risen an average of 8.2% since last year. This figure includes a 19.8% increase in the cost of energy and an 11.2% increase in the cost of food. 

Without further ado, here are some of the most potentially-impactful changes being introduced to Social Security in 2023: 

Supersized COLA

The upcoming 8.7% cost of living adjustment (or COLA, for short) will make last year’s 5.9% increase seem modest by comparison. As part of the largest COLA since 1981, recipients of Social Security will see their monthly benefits rise by more than $140 starting in January 2023. The average monthly payout should be roughly $1,827 per person, up from $1,681 in 2022. 

Per the SSA website, “The Social Security Act ties the annual COLA to the increase in the Consumer Price Index as determined by the Department of Labor’s Bureau of Labor Statistics.” This year’s benefits boost should help lessen the burden Americans are experiencing from their declining purchasing power. 

Increased Wage Base

The Social Security wage base denotes how much of a taxpayer’s annual income is subject to the 6.2% Social Security tax rate. Specifically, it sets the limit for how much of your earnings are taxed in order to fund the country’s Social Security program. The limit for 2023 will increase to $160,200 from last year’s limit of $147,000. That means you’ll pay Social Security tax on the first $160,200 you earn, but not on any earnings that exceed $160,200.

For some, this adjustment could result in a higher tax burden; after all, a larger portion of your earnings will be taxable by Social Security. But there is at least one hidden perk for high earners that bears mentioning. Paying more Social Security taxes while working means that more of your earnings will ultimately get credited to your future benefits. Since the amount you earn (and pay in taxes) during your career plays a significant role in the size of your total Social Security payout, a higher wage base could translate into a larger total payout. Note that the timing of your benefits claim is also an important factor in determining your total payout. 

Rising Earnings Limit

Many opt to start receiving Social Security benefits before they’ve reached full retirement age, but doing so comes with a penalty if their earnings exceed certain thresholds called earnings limits. Those earnings limits are rising in 2023. 

Workers who earn more than $21,240 prior to full retirement age will have their Social Security benefits reduced by $1 for every $2 they earn in excess of that amount. Workers who will reach retirement age in 2023 and earn more than $56,520 will have their benefits reduced by $1 for every $3 they earn in excess of that amount, but only until the month they turn full retirement age. 

Bear in mind that these penalties only apply to the months and years prior to full retirement age, which is between 66 and 67 years old depending on when you were born. Upon reaching full retirement age, you can earn as much income as you’d like without your Social Security benefits being impacted.

How might Medicare and Medicaid recipients be impacted?

Fortunately for many seniors, the Centers for Medicare and Medicaid Services recently announced that Medicare Part B premiums will decrease by 3% (or about $5.20) in 2023. This will be the first drop in over a decade and only the fourth drop since the program’s inception in 1965. 

Medicare beneficiaries over 65 have their Part B premiums automatically deducted from their monthly Social Security checks, so keep this in mind if you struggle to see the full 8.7% cost-of-living adjustment reflected in your benefits next year. 

One potential downside of receiving larger Social Security payments next year is that your income status could change, possibly shifting you to a higher tax threshold. This might preclude you from accessing certain government benefits, like Medicaid, or you might have to pay more each month in Medicare Part B premiums, which scale with income. At any rate, be sure to consult with your financial professional before making any changes to the way you file your benefits.

_{“Social Security Changes – Cola Fact Sheet.” Accessed November 1, 2022. https://www.ssa.gov/news/press/factsheets/colafacts2023.pdf.}

_{“Social Security.” SSA. Accessed November 1, 2022. https://www.ssa.gov/benefits/retirement/learn.html.}

_{“Social Security.” SSA. Accessed November 1, 2022. https://www.ssa.gov/cola/.“Social Security.” SSA. Accessed November 1, 2022. https://www.ssa.gov/news/press/releases/2022/#10-2022-2.}