Next year could bring the biggest increase to Social Security benefits in four decades, with rising prices fueling forecasts of a nearly double-digit cost-of-living adjustment (COLA) for 2023.
The inflation gauge used by the Social Security Administration (SSA) to set the annual COLA came in at 9.1 percent for July — the first of three months the agency uses to determine the final figure, slated to be announced in October. Any increase in benefits would take effect in January 2023.
“It’s not possible to be precise until we see the data for the next two months, but it’s probably safe to say at this point we can expect a COLA in the 8 to 10 percent range,” says David Certner, legislative counsel and director of legislative policy for government affairs at AARP. That would be the biggest increase since 1981, when the COLA was 11.2 percent.
Any estimates are preliminary; the actual COLA will depend on changes in consumer prices through the end of September. A 9 percent COLA would boost the average Social Security retirement benefit by about $150 a month in 2023.
“I think somewhere in the 9 percent range is probably a reasonable guess,” says Richard Johnson, director of the retirement policy program at the Urban Institute, a Washington, D.C.-based research organization.
Johnson notes that July’s inflation rate dipped slightly from June’s. “If that trend continues, we’re looking at about an 8.6 percent COLA, but it could be a little higher,” he says. “It’s hard to predict exactly how, in particular, energy prices are going to evolve over the next few months. I think that’s probably the big uncertainty.”
Economist Bill McBride, in his Calculated Risk blog, estimates a similar range of 8.5 percent to 9 percent. Josh Gordon, director of health policy for the Committee for a Responsible Federal Budget, a nonpartisan fiscal policy think tank, predicted 9.9 percent “if things continue on trend” but says the COLA could be around 8.9 percent “if we had no more inflation for the rest of the year.”
The 2022 COLA of 5.9 percent increased the average retirement benefit by $92 a month. In 2021, payments grew by an average of $20 a month on the back of a 1.3 percent adjustment.
A rise in Medicare Part B premiums in 2023 would offset a portion of the COLA increase for Social Security recipients who have Medicare premiums deducted directly from their benefit payments (as is the case with about 70 percent of Part B enrollees). However, the 2023 Part B premium increase is expected to be smaller than this year’s record increase. Medicare typically reveals the following year’s premium prices in October, around the time the SSA announces the new COLA.
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How Social Security calculates the COLA
Social Security benefits have been adjusted for inflation annually since 1975. Specifically, they are adjusted using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), an official measure of the monthly price change in a market basket of goods and services, including food, energy and medical care.
The CPI-W is a subset of the main Consumer Price Index, which measures a broader range of retail prices (and ran slightly lower in July, at 8.5 percent). To determine the COLA, the SSA compares the average CPI-W for July, August and September to the figure for that same period the year before.
For example, the CPI-W in July 2021 was up 6 percent from July 2020. The year-on-year increases in August and September 2021 were 5.8 percent and 5.9 percent, respectively. Averaging those three figures produced the 5.9 percent COLA that went into effect in January 2022.
Prior to that, the COLAs for the previous 10 years had averaged 1.7 percent, ranging from zero in 2015 to 3.6 percent in 2011. If there is no inflation, there’s no COLA — that happened in 2009, 2010 and 2015. The biggest adjustment was 14.3 percent in 1980.
COLA increases by year
Note: Since 1983 COLA changes take effect the next Jan. 1
|YEAR||COLA %||YEAR||COLA %|
Impact on trust funds ‘likely minimal’
Social Security is funded by a payroll tax of 12.4 percent on eligible wages — employees and employers each pay 6.2 percent. (Self-employed people pay both shares.) The maximum amount of work income subject to the Social Security tax is currently $147,000, a number that will be adjusted for wage increases in 2023.
The money paid in by today’s workers goes to cover current benefits, with any excess going into Social Security’s trust funds. Those funds currently have a surplus of about $2.8 trillion, but the reserve is expected to shrink in coming years as benefit payouts exceed revenue.
In their latest annual report, Social Security’s trustees project that the surplus will be exhausted by 2035 without changes in how the program is financed. If that happens, monthly Social Security payments could be reduced by about 20 percent.
However, the impact on the trust funds of significantly higher payments next year “is likely minimal or at best unclear,” says AARP’s Certner.
“There are many factors that go into the long-term funding calculation in addition to projected payouts,” he says, “including projected levels of employment and higher wages (which often all go together), which brings in more revenue.”
Andy Markowitz covers Social Security and retirement for AARP. He is a former editor of the Prague Post and Baltimore City Paper.