Social Security is a vital source of income for millions of seniors. And today, retirees may be more dependent on those benefits than usual.
The stock market has been extremely volatile since the beginning of the year. As such, many retirees rely more on their Social Security income so they can leave their wallets alone and avoid losses.
Meanwhile, Social Security benefits are subject to a cost of living adjustment, or COLA, each year. The purpose of COLAs is to ensure that seniors can maintain their purchasing power if the cost of living rises due to inflation.
This year, inflation has risen to an almost unbearable rate, leaving seniors wondering what kind of increase their Social Security benefits could get in 2023. The good news is that we are getting closer to answering that important question. The bad news is that seniors will have to wait a few more months for those details to become available.
Several changes are coming
Social Security COLAs are based on third-quarter data from the Consumer Price Index for Urban Wages and Employees (CPI-W), which tracks fluctuations in the cost of consumer goods and services. While we know that the cost of living has increased across the board this year, we won’t have a full set of inflation data for the third quarter until that quarter is actually over.
As such, the Social Security Administration (SSA) usually announces its COLA in the first half of October, and this year should be no exception. Seniors can also expect the 2023 COLA to far exceed the 5.9% boost benefits introduced in 2022.
In addition to COLA details, the SSA usually announces a series of significant changes in October that could affect both seniors and employees. For starters, it should also announce changes to its annual income test limit, which will apply to seniors who work and receive Social Security benefits at the same time.
The SSA should also announce the wage cap for 2023 in October. Each year, the amount of wages subject to social security taxes is capped at a certain limit. This year, that limit was $147,000. Workers should expect a higher wage cap in 2023, but we won’t know how much it will rise until October.
Stay tuned for important news
Clearly, a lot of vital information is coming in for Social Security in just a few months. While seniors eagerly await news of a higher COLA, they can and should take steps to try to stretch their current benefits as inflation rises. That may mean cutting back on strategic spending or looking for other ways to generate income, such as working part-time.
Those who are still active may also start thinking about ways to lower their tax burden in the coming year, as it is reasonable to assume that the wage cap will rise again. Admittedly, it is the higher earners who are affected by an increase in the wage cap. But those looking to avoid a large tax bill can play around with various strategies such as maximizing the retirement plan and HSA contributions to exempt as much income from taxes as possible.