The Social Security Administration recalculates Social Security benefits annually to keep pace with inflation. The cost of living allowance is based on the Consumer Price Index for all Urban Wage Earners and Clerical Workers for the third quarter of the year. The increase is announced in October and goes into effect with the December benefit, which is paid out in January of the following year.
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The 5.9% increase for 2022 was announced in October 2021, when inflation was lower than levels seen so far in seen in 2022. The CPI-W has increased by 9.8% in the past year. Although next year's COLA won't be calculated until after the third quarter ends on Sept. 30, The Senior Citizens League, using inflation trends seens thus far in 2022, forecasts a 10.5% adjustment for 2023. That would put an extra $175+ in the pockets of retirees, based on the average benefit of $1,668 per month, Newsweek reported. However, if inflation increases more than expected, the COLA could reach 11.4%. If it stays the same or cools somewhat, the COLA would still be a hefty 9.8%.
But that news may not be as good as it sounds for many seniors. There are a few drawbacks to such a large COLA increase, as reported by Newsweek.
High COLA Increases Could Push Some Seniors into Higher Tax Brackets
Seniors with additional income from interest, dividends, investments or earned income could have to pay taxes on their Social Security benefits for the first time. Seniors who are married, filing jointly, and earn more than $44,000 for the year could have to pay taxes on up to 85% of their benefits, according to the SSA. Those who earn between $32,000 and $44,000 may be taxed on up to 50% of their benefits. Individuals earning $25,000 to $34,000 may see 50% of their benefits taxed. Those making more than $34,000 could have to pay taxes on up to 85% of their Social Security benefits.
For those who were close to any of these lines, a large COLA increase could push them over the edge. Unexpected tax bills can cause unnecessary stress for seniors and, ultimately, these individuals would not gain any additional income from the COLA increase.
Even Double Digit Increases Will Only Keep Pace with Inflation
COLA increases are designed to help seniors pay their bills in the face of rising prices, but if inflation continues at its current pace, the annual increase may not be enough. If anything, Newsweek reported, it would only help seniors stay afloat amid rising prices.
The CPI-W May Not Be an Accurate Indication of Senior Living Expenses
Finally, the CPI-W is just one economic indicator to show whether prices are increasing or decreasing. When it comes to senior expenses, it may not be the best gauge. The CPI-W only includes expenses paid by individuals working hourly-wage or clerical jobs and includes gas prices in its calculations. Since retirees don't work and don't commute to work - and some don't drive at all - the number has less relevance than it might for working Americans. On the other hand, older adults face rising medical bills, with seniors spending double what younger people do on healthcare, according to Newsweek.
Could This New Bill Change How COLA Is Calculated?
To compensate for these shortcomings, Hawaii Senator Mazie Hirono recently reintroduced the Protecting and Preserving Social Security Act. Among other things, the bill introduces ways to calculate COLAs to more accurately reflect the prices of items that matter most to seniors, including food, housing and medical care.
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In the meantime, however, seniors may have to do their best to cope with a record-high increase that could mean increased taxes and, ultimately, less retirement income at the end of the day.
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This article originally appeared on GOBankingRates.com: Social Security: 3 Reasons Why Record COLA Increase in 2023 Could Backfire on Seniors