(USA Today) - Social security beneficiaries could get one of the largest cost-of-living raises since 1981 next year if inflation remains hot, but some analysts are warning people not to get too excited yet.
The annual cost-of-living adjustment (COLA) for social security benefits is based on the consumer price index for urban wage earners and clerical workers (CPI-W), a subset of the overall consumer price index.
In June, CPI-W rose 9.8% from a year ago for the largest increase since October 1981 and outpacing the broader headline gain of 9.1%. Based on that, COLA could be 10.5% next year, up from 5.9% this year, Mary Johnson, policy analyst at The Senior Citizens League, estimates. A 10.5% COLA would increase the average retiree benefit of $1,668 by $175.10, she said.
While any COLA increase would be welcomed by retirees, especially those suffering as the highest inflation in 40 years is already well above their 5.9% raise this year, Johnson warns retirees won’t be getting the full raise and could end up with less in the end.
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Medicare Part B
Most retired and disabled Social Security recipients have Medicare Part B, but CPI-W doesn’t account for increases in Medicare Part B premiums and so it’s not included in COLA either.
So, while COLA rose this year by 5.9%, which was the largest increase since 1982, Part B increased a whopping 14.5%, among the largest jumps in the program’s history.
“The Part B premium is automatically deducted from Social Security checks, and in 2022 beneficiaries are still smarting from this,” Johnson said.
Higher income can mean higher taxes
A higher social security payout may sound great, but remember, those dollars might be taxable if you have provisional income above $25,000 or $32,000 for a married couple. The IRS calculates provisional income by adding the recipient’s adjusted annual gross income, plus any other tax-exempt income, plus 50% of all Social Security benefits.
“Over time more seniors are hit with the tax for this reason,” Johnson said. “High COLAs will hurry this along.”
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The U.S. Social Security Administration estimated in a 2022 report that 40% of all U.S. retirees pay taxes on their benefits.
Johnson estimates “tens of thousands” of retirees who haven’t paid taxes on benefits in the past may discover they must start doing so in 2022 taxes because of the 5.9% increase and even more if COLA sees another huge jump in 2023.
“Because the income thresholds are not adjusted like ordinary tax brackets, these once-in-a-lifetime COLA increases could lead to permanently higher taxes for many retirees,” she said. “We strongly urge Social Security recipients to consider having money withheld from their Social Security benefits if they think they will be affected, especially because of this large increase we expect for 2023 as well.”
Recipients can do this online by setting up a “my Social Security account.”
Higher income can mean fewer benefits
Because people’s incomes can get a boost with higher social security benefits, people might be disqualified from certain benefits. These include adjusted Medicare health and prescription drug benefits for low-income beneficiaries. A larger income can end up pushing you up into a higher bracket that comes with higher Medicare Part B and Part D premiums.
“So, while a high COLA is better than no COLA at all, there are consequences that boosted Social Security income can have that affect overall financial security,” Johnson said.
By Medora Lee
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
