3 Reasons Why a Major Social Security Cost of Living Adjustment Is Bad News

Will Social Security’s next cost of living (COLA) adjustment make the 2022s negligible? There is reason to believe it could.

Admittedly, it’s too early to come up with a solid estimate because we need third quarter data from the Consumer Price Index for Urban Wage Earners and White-collar Employees (CPI-W) to calculate that number exactly. The CPI-W measures changes in the cost of goods and services, a large part of which is gas prices. They have decreased in recent weeks, but we don’t know what the second half of August and September have in store for us.

Either way, seniors could be looking at a COLA for 2023 that is over 8%, and one that could be close to 11% based on previous estimates. Even if we land in the middle, that could give seniors a 9% increase, which is much more significant than the 5.9% COLA they got in 2022.

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But while a large increase in Social Security may seem like a good thing, in reality it can have its drawbacks. This is why.

1. It means the cost of living is rising across the board

When Social Security benefits rise, it means inflation levels are high enough to warrant that boost. But that does not help seniors financially in any way. If anything, maybe they can only keep pace with the rising cost of living. And often that doesn’t even happen because COLAs are calculated based on a limited data set.

2. It may push some seniors into a higher tax bracket

Many seniors struggle with bills and cannot afford tax surprises. But a large COLA could push some Social Security recipients into a higher tax bracket, forcing them to bear a higher IRS burden.

Not only that, but taxes on Social Security benefits themselves come into play once earnings reach moderate levels. Those who collect Social Security, but also take modest withdrawals of nest eggs, may result in some of their benefits being taxed.

3. It May Make Some Seniors Pay More for Medicare

Medicare’s standard Part B premium changes from year to year. But higher earners pay more than the standard amount. And a big jump in Social Security benefits could put some seniors in a position to bear higher Part B premium costs.

And it’s not just Part B. Higher earners also face a surcharge on their Part D premiums.

Now, a major COLA in 2023 won’t automatically subject seniors to higher Medicare costs, because surcharges are based on reported earnings from two years earlier. But if Social Security benefits rise sharply, some seniors could face higher premiums in a few years.

Keep things in perspective

Obviously, seniors need a fairly generous 2023 COLA to keep up with the cost of living. But it’s important to recognize that whopping COLA may not be the great thing that beneficiaries think it is. At best, seniors can use that raise to better manage their bills. But it’s unlikely that most Social Security recipients will be in a much stronger financial position than they are now.

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