Changes to Social Security Coming in 2023

social security changes

Social Security is a staple of American life. Nearly 90% of all retirees rely on their Social Security benefits to pay for the basics of day-to-day life, including mortgages and utilities. The program keeps 22.5 million people from falling into poverty each year[1]. With over 69 million beneficiaries, Social Security is a long-standing success story that is working to keep up with the ever-changing economy and financial landscape. One way it does this is through Cost of Living Adjustments.

Cost of living adjustments, or COLA, began in 1975[2]. This adjustment for inflation can make a big difference in your Social Security benefit check. That cost of living adjustment can make it easier to afford basic monthly necessities like food and utilities, as well as a very affordable emergency response solution from Alert1 to keep you safe and secure during every month of 2023.

How Your Social Security is Calculated

Let’s start with how your Social Security benefit is calculated in the first place, with some help from The Motley Fool:

The calculation starts with your earnings history. The Social Security Administration looks at the earnings for each individual over their lifetime and chooses the 35 years during which you earned the highest amounts. This creates a bottom line: The Average Indexed Monthly Earnings, or AIME.

Once that number is established, the administration then uses a formula to produce another number, known as the Primary Insurance Amount, or PIA. The formula used to calculate this one is based on your age and starts at the age of 62. To provide an example, let’s look at someone who was born in 1960, which would make them currently 62 years old. Here’s how their PIA is calculated:

·         Start with $1,024 of the AIME. Take 90% of that.

·         If the AIME is between $1,024 and $6,172, take an additional 32% of that.

·         If the AIME is over $6,172, take an additional 15% of that amount.

Keep in mind that while those percentages don’t change from year to year, the dollar amounts do. Also remember that this is based on taking the benefit at your full retirement age; if you file for Social Security early, you might see as much as a 30% reduction in monthly benefits.

Confusing? Yes it is. But fortunately, there are things like the Social Security Benefits Calculator from AARP to help.

What is the Cost of Living Adjustment?

As the prices of goods and services go up, your Social Security benefits go up to keep up with the changes. A cost of living adjustment (COLA) is meant to keep pace with inflation and make it easier for you to maintain your usual standard of living[3]. The Social Security Administration looks at the Consumer Price Index (CPI) for three months of the year – July, August, and September – and compares that to the prior year[4]. 

In 2021, the COLA was 1.3%, which led to an adjustment of about $20 per Social Security check, according to the AARP. In 2022, the COLA was higher at 5.9%, which increased the average benefit by about $92 per month. In 2023, the current forecast is a COLA of at least 8.5%. That’s based on the CPI-W of 9.1% in July. Some experts believe it could reach as high as 10%. That would be the highest increase in social security benefits since the inflation of the 1980s, when the COLA increased by 11.2% in 1981, and would put about $150 more in your pocket per month.

What Can Change Your COLA?

While the cost of living adjustment won’t change once it’s set by the government, other factors might come into play that affect how much you actually get in your check. One of them is a rise in Medicare Part B premiums. About 70% of individuals have their premiums deducted directly from their Social Security benefit payments[5]. If the premiums rise (as they are almost certainly going to), that will cut into the COLA increase. That change could be substantial; it went up by $30 between 2021 and 2022, according to Medicare Resources. We won’t know the financial impact for sure until October, which is when the premium changes are announced by Medicare.

Another thing COLA doesn’t take into account is the cost of prescription drugs. While the Inflation Reduction Act of 2022 aims to reduce the out-of-pocket limit of Medicare Part D to $2,000 per individual, it will take until 2025 for that to kick in to reduce your costs for prescription drugs.

Will This COLA Mean Social Security Runs Out of Money?

There has been a lot of talk lately about the funding of Social Security, especially since the latest annual report from the Social Security Administration suggests the $2.8 trillion surplus in the trust funds will be exhausted by 2035 if there are no changes in financing for the program. Currently, the payroll tax of 12.4% on up to $147,000 in eligible wages is what fuels Social Security (employees pay half of that, and employers pay the other half, while self-employed individuals cover both). However, the AARP believes that the effect of the COLA on the trust funds will be minimal. That could be because while the COLA payout increases what comes out of the trust funds for recipients, levels of employment and wages are also going up, which can offset the change[6].

Making Your Social Security Go Further

If the cost of living adjustment isn’t enough to help you live comfortably on your Social Security benefit, there are some ways to help make the money go further. Some of these are simple and can be implemented right now, while others will take some foresight and planning.

·         Pay attention to taxes. For many of us, Social Security is a tax-free benefit. But that depends on your state, as some do tax Social Security checks; if you work at all to supplement your income, you might find that as much as 85% of your check is subject to state tax[7]. If that’s the case, consider moving to an area where there is no state tax or the tax laws are quite advantageous to you.

·         Relocate for lower cost of living. If you are free to move about the country, why not? Going to an area with a lower cost of living will stretch every dollar a bit further. Some of the most affordable states to live in right now include Mississippi, Kansas, Alabama, Oklahoma, Tennessee, Georgia, and Missouri. Find in-depth information on affordable states at World Population Review.

·         Downsize. When you do relocate, downsize. Go with the most affordable home you can find that meets your needs and nothing more. For instance, does having three bedrooms really matter when it’s just you and a spouse? Do you really need a beautiful office space if you are fully retired and won’t be going back to work? Consider your actual needs and plan accordingly to keep more money in your pocket.

·         Stay healthy and safe. Healthcare expenses are on the rise and can hit seniors quite hard. It’s estimated that those between the ages of 65 and 74 spend $13,000 on health care each year, and that goes up to $23,000 between the ages of 75 and 84. Those over the age of 85 can expect costs upwards of $39,000 per year[8]. While there are some healthcare costs you can’t control, there are some ways to stay healthy and safe that can help prevent higher costs, hospital stays, and expensive rehabilitation. An affordable medical alert device can help ensure that you get immediate help if you suffer a fall at home or any other sort of accident. Having assistance at your fingertips can mean the difference between a good (and more affordable) outcome and a very bad one.

·         Examine your budget. Has it been a while since you looked over your monthly budget? There might be items that you no longer need, especially if you are newly retired. For instance, do you still need a subscription to a publication you used only for work? Do you need expensive cable service when you can get the same thing on streaming for cheaper (or even free)? Can you do without restaurant meals a few times a week and cook at home instead? It’s surprising where you can save money!

·         Look into additional benefits. Your basic Social Security benefit might not be all you can get. For instance, there is a spousal benefit that can provide a benefit equal to up to 50% of their payout if you qualify. If your spouse has passed away, survivor’s benefits might be possible. And even if you’re divorced, if you were married for 10 years or more, you might be entitled to more than what you’re getting right now[9]. Contact the Social Security Administration to be sure.

Everyone wants to live a long, healthy life. Making your Social Security benefits stretch further can make that life more comfortable. So can peace of mind. A medical alert system with fall detection is an excellent way to make sure you have that peace of mind and comfort of knowing that if anything happens, help is on the way immediately. Your good health depends upon getting back up on your feet (literally) and that’s something Alert1 Medical Alert Systems can help you do. Consider an affordable emergency button alarm today so you can enjoy your good health (and those retirement benefits) for much longer.