Anyone who knows me also knows that I believe in being grateful for what I have. I appreciate the things I have, whether I earned them or they were given to me. My family, my health, a career I love that allows me to put food on the table. I’ve lived by the mantra that you don’t look a gift horse in the mouth, rather you appreciate all that you have.
I know a lot of folks live by this too – but for many retirees receiving Social Security benefits, it’s easy to be frustrated. 2023 ushered in an 8.7% increase, the largest raise in Social Security benefits in over forty years. Don’t get me wrong, this was a welcome increase and has helped millions of Social Security recipients. At least a little bit. But was it enough?
Unfortunately, for many retirees it’s not. In fact, according to a new survey by the Senior Citizens League, 54% of older Americans think the increase in the Social Security cost-of-living adjustment (COLA) this year won’t keep up with inflation. Even worse, a full 96% of the survey’s respondents don’t think this year’s sizable bump will allow them the opportunity to catch up₁.
And that’s not all. Some retirees worry that the increased benefits will create a bigger tax bill, too. 2023’s COLA, which increased the average retiree benefit by more than $140 per month will have the unintended consequence of pushing some retirees over income thresholds, which are not indexed for inflation. The result? They may end up having to pay income taxes on part of their Social Security benefit. In fact, more than half of the respondents expressed concern that they will pay more in 2022 taxes due to the 5.9% COLA increase they received last year.
The problem here, according to Mary Johnson, a Social Security policy analyst for The Senior Citizens League is that “…. even as inflation moderates, it will be extremely difficult for lower and modest income seniors, and those who have been retired the longest to ‘dig out’ from the shortfall between what Social Security beneficiaries received over the past two years, and the cumulative effect of actual inflation.₂”
Women will likely fare worse than men, too. According to the Social Security Administration, nearly 9 out of 10 people aged 65 and older receive a Social Security benefit. Among elderly Social Security beneficiaries, 12% of men and 15% of women rely on Social Security for 90% or more of their income₃.
And unfortunately, women age 65 and older typically have less retirement savings and smaller Social Security payments than men. This is primarily due to the earnings gap and time out of the workforce for caregiving and are more than twice as likely as men to be living in poverty. A large COLA helps them, but inflation has made the cost of living on so many items so expensive that it may not be enough.
The COLA increase, coupled with a decrease in Medicare Part B premiums this year, was expected to make a positive difference in helping make ends meet for retired senior citizens and disabled workers. Inflation in January was 6.3%, down from 7.5% a year ago and the high of 9.1% in June of 2022, yet many items that seniors regularly consume, such as food to gasoline, remain out of sight.
And then there’s the issue of taxes. A rise in benefits means a rise in your annual income. Those who surpass income limits will start to see their benefits taxed, and unfortunately the thresholds are surprisingly low. For example, if you file as an individual and your combined income – your adjusted gross income, plus nontaxable interest earned on investments, plus one-half of your Social Security benefits – is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If you earn more than $34,000, up to 85% of your benefits may be taxable.
An increase in income from a COLA can also result in higher Medicare premiums. If your income is higher than $97,000 (individuals) or $194,000 (joint), you will see an increase in Part B and Part D premiums. Not only that, but those who receive low-income assistance for healthcare costs could also see their aid reduced if their income increases enough.
Folks, don’t get me wrong – I am not advocating against higher COLA increases. Quite the opposite. Retirees in particular need every advantage they can get to make ends meet in today’s high inflationary climate. But you need to evaluate an increase in Social Security benefits in the context of your entire financial situation so that you’re not surprised at potential tax and other consequences in other areas. And of course, don’t look the COLA gift horse in the mouth!
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.