Social Security COLA Set at 8.7 Percent for 2023

The SSA bases the COLA on the percentage change in the CPI-W for the third quarter from one year to the next. The 2023 adjustment represents the difference between the average CPI-W index from July, August and September of 2021 and the average for those months in 2022.

The resulting increase, which is also applied to veterans’ disability benefits and retirement pay, is the biggest since 1981, when the COLA was 11.2 percent. The 2022 adjustment of 5.9 percent followed more than a decade of low inflation, with the COLA averaging less than 1.4 percent from 2009 to 2021.

Medicare and inflation impact

The 2022 COLA, which increased the average retirement benefit by about $92 a month, was offset in part by a record $21.60-a-month hike in the standard Medicare Part B premium, which for most Medicare enrollees is deducted directly from Social Security payments.

2023 will see the opposite effect, with a larger COLA and a rare drop in premiums for Part B, the portion of Medicare that covers outpatient services such as doctor visits. “That means that Social Security beneficiaries will see more money in their pockets next year,” said Nancy Altman, president of the advocacy group Social Security Works.

The Centers for Medicare & Medicaid Services (CMS) announced last month that the standard Part B premium will decline in January from $170.10 to $164.90 a month. The decrease reflects lower-than-expected Medicare spending on the new Alzheimer’s drug Aduhelm, savings the agency had pledged to pass on to consumers.

An inflation slowdown could also stretch the COLA’s effect on Social Security beneficiaries’ spending power. Whereas consumer prices have risen at a faster clip than the 5.9 percent COLA throughout 2022, forecasters predict inflation will cool in the year to come.

Global financial forecaster Trading Economics projects U.S. inflation to decline to 4.4 percent by mid-2023, and personal finance publisher Kiplinger predicts a rate of 3 percent to 4 percent at year’s end.

Two-thirds of Americans age 50 and older are somewhat or very worried that Social Security benefits may not keep up with inflation in years to come, according to a new AARP survey.

The COLA is “one of Social Security's most important and unique features” because, unlike other retirement resources such as 401(k) accounts and private sector pensions, it is designed to keep up with inflation, Altman said. “It allows Social Security beneficiaries — most of whom are just one shock away from falling into poverty — to tread water.”

Payroll tax threshold also up

Social Security is largely funded by a payroll tax of 12.4 percent on eligible wages — employees pay 6.2 percent and employers pay the other 6.2 percent. (Self-employed workers pay the entire 12.4 percent.) The maximum amount of earnings subject to the Social Security tax will increase next year from $147,000 to $160,200.

Those contributions go toward monthly payments for today’s Social Security beneficiaries, with any excess funneled into two trust funds, one for retirement and survivor benefits and the other for disability benefits. The funds currently have a surplus of more than $2.8 trillion, but Social Security’s trustees estimate that reserve will be drained by the mid-2030s without congressional action to shore up the system’s finances.

Absent such action, benefits would continue to be paid out from incoming payroll taxes, but they would be about 20 percent lower, according to the trustees’ most recent annual report.

“AARP continues to urge Congress to work together in a bipartisan way to protect and strengthen Social Security for the long term,” Jenkins said. “Millions of Americans work hard throughout their lives to earn their benefits, and Social Security is a promise that must not be broken. We urge leaders of both parties to work together to protect Social Security for years to come. The stakes are too high for anything less.”