Social Security is the primary source of retirement income for millions of Americans. The larger percentage of your retirement income derived from Social Security, the more today’s high inflation rates will bust your budget. The only bright side is high inflation can lead to a larger than standard Social Security cost-of-living adjustment (COLA)
How Big of a Raise Did Social Security Recipients Receive in 2022?
Recipients of Social Security received a 5.9% COLA for 2022. While this significant increase sounds great, it is below the increase in the cost of many items retirees must purchase. I am mainly talking about housing, food, and healthcare.
How Big Will the Social Security COLA Be For 2023?
The recently released Consumer Price Index (CPI) stats show price increases over the past 12 months through March have risen a staggering 8.5%. This is the single largest year-over-year inflation number since January of 1982. Ronald Reagan was President, and Paul Volker raised interest rates to tame the stagflation of the seventies.
With the supply chain issues and Russia’s invasion of Ukraine, it is hard for anyone to guess how long it will take for inflation to drop to the sub 2% numbers consumers have grown used to during the past few decades. With this is in mind, the Senior Citizen League has estimated that the Social Security cost-of-living adjustment for 2023 could 8.9%. This would represent the biggest Social Security COLA since the year 1981.
Keep in mind these are just estimates. The Social Security Administration will base the 2023 Social Security COLA on the third quarter CPI-W. Assuming inflation continues into the third quarter at similar rates to today, Social Security recipients could see another substantial Social Security COLA.
Inflation Will Likely Also Increase Retirement Incomes
As retirees continue to receive Social Security COLAs, they may also be hit with larger tax bills on their retirement income. Receiving a Social Security COLA doesn’t directly change your tax brackets; it may push you above the income thresholds where your Social Security benefits are received tax-free.
You don’t need to be rich to have enough income for your Social Security benefits to become taxable. Retirees who file a federal tax return as an “individual” with a combined income between $25,000 and $34,000 will likely owe federal income taxes on 50% of their Social Security benefits. If you earn more than $34,000: up to 85% of your Social Security benefits may be taxable.
For those filing their federal taxes as “married filing jointly” and who have a combined income between $32,000 and $44,000, you may have to pay income tax on up to 50% of your Social Security benefits. If your combined retirement income is more than $44,000, up to 85% of your Social Security retirement income could be subject to taxation at the federal level.
Similarly, as prices have climbed, retirees may have needed to make larger withdrawals from their pre-tax retirement accounts. This, in turn, increases their total taxes owed and potentially pushes their retirement income into higher and higher income-tax brackets.