The following article provides a discussion and update on the Cost of Living Adjustment (COLA) over the last few years and predictions for the upcoming year. You can see the final and official 2023 COLA raise below.
The COLA figure is critical for over 70 million Americans especially retirees whose social security and SSI benefit raise is directly tied to the COLA increase.
So the larger the COLA the larger the increase in benefits for social security recipients. This is especially important in a rising inflation environment where the costs of goods and services are continually rising.
According to the Social Security Administration (SSA), 90% of people aged over 65 receive some amount of Social Security benefits. More than 40% of Americans over 65 rely on Social Security for the majority of their income.
The COLA annual increase is based on the percentage increase (if any) in the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the current year over the average for the third quarter of the previous year in which a COLA became effective.
The government, via the BLS and SSA, publishes the official annual cost-of-living adjustments typically in the middle of October, with changes to social security, retiree benefits and medicare effective for the subsequent year.
However trailing inflation/CPI levels can provide a strong indication of the final COLA increase, well ahead of the official release in October as discussed in the subsequent sections.
2023 COLA – 8.7% Increase Confirmed
The higher than normal levels of inflation despite aggressive Fed rate hiking had a silver lining for many social security recipients with the SSA confirming a 8.7% increase in Social Security benefits and Supplemental Security Income (SSI) payments in 2023.
This is in line with earlier projections and is one of the largest increases since the 1980’s. The 2023 8.7 percent COLA will result in an approximately $146 increase to the average monthly retirement benefit.
The SSA will mail COLA notices to retirement, survivors, and disability beneficiaries, SSI recipients, and representative payees over December with their specific benefit changes in 2023. You can also check this information online in early December.
Other key updates from the SSA for 2023 include:
- The maximum SS benefit at full retirement age is going from $3,345/mo to $3,627/mo in 2023
- The average SS benefit (across all recipient groups) is going from $1,681/mo to $1,827/mo
- The maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $160,200. This means that the average employee will pay around $9,930 in Social Security taxes (excluding Medicare taxes)
- The retirement earnings test exemption limit for people reaching their full retirement age in 2023 will increase to $56,520, from $51,960 in 2021.
The downside of a large COLA raise is not great however for future retiree’s due to the faster depletion of the Social Security fund. This will result in SS benefits getting lower or running out sooner than predicted. Currently it is expected that benefits will start shrinking (to 80%) from 2034.
2024 COLA Increase Projections
With inflation expected to fall considerably in 2023, the 2024 COLA increase will like be much more moderate, likely below 4%.
I will post future 2024 COLA forecasts as they evolve and you can subscribe to get the latest updates.
2022 COLA Increase (5.9%)
With inflation (CPI) running much higher than in past years, seniors and retirees will see a nice boost to their social security benefits check in 2022. The SSA estimates that the average Social Security and Supplemental Security Income (SSI) monthly benefit will rise to $1,657 – which reflects a $92 increase.
Forecasters and publications had predictions ranging from a 4.3% to 6.2% COLA increase in 2022. The final number was nearer the top end of the range, but in line with overall expectations.
The final number came in at 5.9% for 2022. This is the largest increase in 40 years. A similar increase of 5.8% occurred last in 2008, during the global financial crisis! Of course this is all relative because if inflation in the broader economy is higher than this, the raise will be quickly eaten up the higher cost of goods and services.
The 2022 increase is also be over four-and-a-half times the 2021 COLA increase! See the table below for other items impacted by the COLA adjustment and other projected year-over-year changes.
2019 to 2021 COLA increases
The Social Security Administration (SSA) officially confirmed a 1.3% COLA increase in 2021. For the average retiree that is a $20 raise from 2020 levels ($1,523 p/month). The 1.3% COLA is the smallest since 2017 and slightly below the 1.4% average over the past decade. See the table above for other items impacted by the COLA adjustment and other year-over-year changes
Other notable items
- The maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $142,800. Above this income limit, no SS taxes will be levied
- The maximum SS benefit goes to $3,148, with the average (across all workers) forecasted to rise to $1,543.
- No change to the social security tax rates
The COLA increase is based on the percentage increase (if any) in the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the current year over the average for the third quarter of the previous year in which a COLA became effective. The government, via the BLS, publishes the official annual cost-of-living adjustments typically in late October, with changes to social security, retiree benefits and medicare effective for the subsequent year.
The social security tax rate above is the combined rate for Social Security and Medicare. For employees the employer pays half the social security tax, whereas for self employed they have to pay both the employee and employer components and hence the higher tax rate.
Once a worker passes the maximum taxable earnings (or social security wage base) then all earnings above that amount are NOT subject to social security taxes.
2018 COLA Increase – 2%
The Social Security Administration (SSA) has announced a relatively large 2% Cost of Living Adjustment (COLA) for 2018. Benefits like Social Security or Supplemental Security income, that are tied to COLA will reflect the 2% increase in January 2018. The increase is equivalent to about $27 more a month or $329 a year for the average retired worker getting social security payments.
Based on 2% increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) has also increased to $128,700. This will result in approximately 7% to 8% of workers (~12 million people) paying more in Social Security taxes in 2018.
2017 COLA Increase – 0.3%
Despite fears that there would not be a Cost of Living Adjustment (COLA) increase in 2017, the Social Security Administration (SSA) announced that benefits will in fact increase by 0.3% in January 2017. Over 65 million Americans who receive Social Security benefits or Supplemental Security Income payments will benefit from this increase. This is following a year (2016) where no increase was provided. The table below shows recent COLA changes and associated updates.
[2016 COLA update] As expected the 2016 Cost of living adjustment (COLA) was 0%, meaning that no changes to your social security taxes and benefits next year. Details over 2015 levels are shown in the table below.
*A decrease in full maximum benefits occurs when there is no COLA, but there is an increase in the national average wage index.
The Social Social Administration (SSA) announced a 1.7 percent cost of living adjustment (COLA) for 2015 (vs 1.5% in 2014). As a result the following changes, shown in the table above, to your social security taxes and income will result. All changes will take effect in January.
The main impact to tax payers will be an increase in earnings subject to the Social Security tax , which increase to $118,500 from $117,000 in 2014. The SSA estimates that this will impact 8% or 10 million off the approximately 165 million workers who will pay Social Security taxes.
Source: Social Security Administration (socialsecurity.gov)