We’ve all felt the effects of a few tough years, primarily due to COVID. First it was the illness itself and the financial fallout from job losses, scale backs and other restrictions. Of course, the markets responded by going a little crazy, too, followed up by the raging inflation rates we’re seeing today. While we’re a resilient bunch here in New England, it’s still been a stressful ride for us. If you’re like me, you welcome any type of good news these days. And once in a while, times like this offer us a glimmer of hope – a silver lining, if you will. And right now, that silver lining is in the form of a potentially impressive COLA on Social Security benefit.
You see, while our current inflation rates are stretching our budgets, they do create a tangible benefit for those currently receiving Social Security benefits. Nearly 9 out of 10 people aged 65 and older receive a Social Security benefit, according to the SSA. Social Security benefits represent about 30% of the income of the elderly. Among elderly Social Security beneficiaries, 12% of men and 15% of women rely on Social Security for 90% or more of their income₁.
Now it’s not official yet, but if current inflationary trends continue for the next couple of months, next year’s Social Security cost-of-living adjustment could increase benefits by 10% or more — the largest annual increase in 41 years. The official Social Security COLA for 2023 will be announced in October and is based on the increase in the average CPI for the third quarter — July, August and September — over the previous year’s third quarter. According to a July report from the US Department of Labor, U.S. inflation as measured by the consumer price index has jumped 9.1% over a year ago₂. This inflation thing is no joke.
According to estimates from the Senior Citizens League, this will mean a boost to the average retiree benefit by $175.10 every month. The nonprofit Committee for a Responsible Federal Budget (CRFB) puts that increase at 11.4% if inflation keeps on its current track. And even if inflation cools, the CRFB estimates a 9% COLA, while the Senior Citizens League forecasts 9.8%₃.
And while Social Security benefits could increase by double digits next year, Medicare premiums may stay level or even decline, leading to a larger net Social Security benefit for most retirees. The Department of Health and Human Services announced earlier this year that it would hold the line on Medicare Part B premiums in 2023 to offset the large premium hike in 2022 of 14.5% that was triggered by the cost of a new drug to treat Alzheimer’s disease. The drug manufacturer later halved the price of the drug, but not in time for HHS to adjust the Medicare premium for this year.
But it’s not all roses, unfortunately. For some, the higher benefit could also increase their tax burden and reduce government benefits for lower-income retirees. And it also complicates the outlook for Social Security for everyone else.
Get this, higher income due to the COLA could result in cuts in income-related benefits for low-income seniors, such as SNAP and rental assistance for low-income beneficiaries. A May-June survey from the Senior Citizens League found that 39% of participants who receive low-income benefits reported their low-income assistance was reduced due to this year’s 5.9% COLA, while 15% reported they lost access to at least one assistance program₄.
Another troubling question is how the ballooning benefit checks could impact the main Social Security trust fund. It’s forecast to continue paying out full benefits through 2034 at which point it can only pay out 77% of scheduled benefits, according to the annual report from the trustees of the programs. Bigger Social Security benefit checks now speed up the timeframe for the dissipation of the trust fund’s reserves. The just-released annual trustees report found an improved outlook for the trust funds the program relies on to pay benefits. The combined asset reserves of both funds are now projected to have a depletion date of 2035, one year later than was projected last year. At that time, 80% of benefits will be payable. However, a much-bigger COLA will cost the program tens of billions of dollars, putting further pressure on the program that is already facing insolvency, said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a nonpartisan, nonprofit organization.
“That will cost the program enough money that it could bring the insolvency date forward a year sooner,” MacGuineas said.
For Congress not to act to try to repair the program would be a huge abdication of responsibility, she said. “There’s not one member of Congress who should look at this report and think, ‘Oh, I know the best course of action is to do nothing,’” MacGuineas said₅.
For now, we will keep our eye on inflation in the coming months to see how it will affect next year’s COLA, and hope that our Washington Wizards will come together to enact changes to sustain Social Security for our generation and those to follow. We might better enjoy the silver lining on the horizon knowing it won’t break the “Social Security bank”.
So as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc.