In October, the Social Security Administration (SSA) announced the biggest boost to next year’s cost-of-living adjustment (COLA) in four decades. The COLA increase of 8.7% has already started hitting the bank accounts of Social Security recipients.
This big raise will certainly help retirees who struggled last year due to a record rise in price levels. Moreover, it will also allow retirees to increase their emergency savings.
Along with these positive impacts of the COLA spike, this spike could potentially have several negative impacts on retirees as well. In this article, we will take a look at the negative impacts of the COLA spike on beneficiaries, as well as on the future of Social Security:
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Impact On Taxes
Experts say that the boost in COLA could raise the tax burden for some recipients. The income thresholds haven’t changed since they were established in 1984. Thus, a growing number of recipients are paying taxes on their Social Security benefits each year. Recipients are taxed on up to 50% of their benefits if their income exceeds the threshold income.
Single taxpayers, for instance, need to pay taxes if their retirement income is more than $25,000, while for married couples, the threshold income is $32,000.
Despite the COLA increase, the average Social Security benefit for recipients will be less than the threshold income, reaching almost $22,000 per single recipient next year. For some retirees, however, the annual income could exceed the threshold income because they have other sources of retirement income as well.
Even for such retirees, however, there is no surety that their income could exceed the threshold income. This is because the taxes depend on several variables, such as the standard deduction (increasing in 2023 to reflect inflation). Moreover, taxes vary based on each person’s tax situation as well.
Thus, it is important that you work with your tax professional and financial advisor to determine ways to manage your taxes on Social Security and other income sources.
Impacts Of The COLA Spike On Medicare Premiums
Higher Social Security benefits will also have an impact on Medicare premiums, but it will mostly impact higher-income seniors. This is because Medicare premiums work on a sliding scale based on income. Thus, some higher-income earners could end up paying more Medicare Part B and Part D benefits.
Even though the income-related monthly adjustment amount that is used to determine the premium for Part B and Part D is adjusted for inflation, seniors with income above Medicare’s income thresholds may face a noticeable increase in premium.
For instance, single seniors with annual income below $97,000 (and married with income below $194,000) will be paying the standard Medicare premium of $164.90. But seniors with income above this threshold will be paying a higher Medicare premium, somewhere between $230 to $560 per month.
There is, however, some good news. The standard monthly Medicare premiums will be falling this year, resulting in a larger Social Security check. The Centers for Medicare & Medicaid Services (CMS) said that the standard monthly premiums for Medicare Part B will drop by about 3%, while the annual Medicare Part B deductible will decline by $7 to $226 in 2023.
This drop would be a big relief, especially after Medicare Part B premiums increased by 14.5% in 2022. Also, the typical Medicare Part D premium is estimated to drop marginally by 2% to $31.50 this year.
Impact On Low-Income Social Security Recipients
For low-income beneficiaries, the COLA spike could mean some cuts in income-related benefits, such as MSP (Medicare Savings Programs), SNAP (Supplemental Nutrition Assistance Program), and Medicaid.
Eligibility for these programs depends on the federal poverty level, and all these programs are indexed for inflation. But if both couples are getting Social Security, a COLA increase could push their income above the threshold limit for SNAP or MSP.
Other programs could also be affected by the COLA increase, including payments to military retirees, disabled veterans, and federal and state retirees. Such impacts of the COLA spike on low-income Social Security Recipients have pushed many to call for a temporary suspension of the federal taxation of Social Security benefits.
Possible Impact On Social Security Fund
Many experts believe that a higher payout could accelerate the Social Security Old-Age and Survivors Insurance Trust Fund’s insolvency date. A trustees report estimates that the Social Security Old-Age and Survivors Insurance Trust Fund could run out by 2034. This fund is used to pay the retirement benefits.
The Social Security Trust Fund was close to insolvency in 1981 as well. At the time, Congress came up with a few measures to reduce the Social Security benefits and raised taxes.
Final Words
Despite the record COLA increase, it is hard to plan a comfortable retirement owing to the above-discussed impacts of the COLA spike. Moreover, high inflation and a potential recession peeking around the corner makes the whole planning thing even more uncertain.
One good way to face these challenges is to use the help of a financial adviser. Your adviser can assist you in managing your finances and ensuring that your assets are safe. The adviser will work with you to review your retirement portfolio and income strategy to make sure that you’re still on track toward meeting your financial goals.
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