Social Security is getting a 8.7% boost in 2023 but a looming recession could spell disaster for future benefits — here is what that means for your retirement
Following a year of sustained inflation, Social Security benefits is receiving their biggest boost in four decades in 2023.
The Social Security Administration announced last October that the cost-of-living adjustment (COLA) for 2023 is 8.7%.
“This may be the first and possibly the last time that beneficiaries today receive a COLA this high,” Mary Johnson, Social Security and Medicare policy analyst at advocacy group The Senior Citizens League (TSCL), said in a press release after the annoucement.
The Fed announced seven rate hikes in 2022 and some economists predict future increases could take the key rate to over 5% in 2023, triggering a recession.
While many retirees will welcome the needed boost to their budgets, the higher COLA combined with the U.S.’s current economic woes may have some dire financial consequences for both beneficiaries and the future of Social Security.
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What does a higher COLA mean for you?
Keep in mind that the significant benefit boost means an increase to your overall income.
Lower-income households could lose eligibility for certain programs, or receive less aid through Medicare Savings programs or Medicare Extra Help or Medicaid. Higher-income beneficiaries may end up paying more in Part B and D premiums if their incomes are higher than $97,000 (or $194,000 for joint filers).
The larger COLA could push you into a higher tax bracket as well. Up to 85% of Social Security benefits can be taxable if your income is over $25,000 ($32,000 for joint filers).
The Social Security Old-Age and Survivors Insurance Trust Fund, which helps pay your retirement benefits, is also expected to run out by 2034, according to the latest trustees report.
After the fund’s reserves are exhausted, you’ll receive about 77% of your benefits instead which would be drawn from tax revenue.
Johnson notes that next year’s higher payout could potentially hasten the fund’s insolvency date — an issue that is not being helped by the large drop in birth rates over the last few decades. Less people means less tax revenue to fund Social Security.
“The last time inflation was this high was in 1981,” Johnson adds. “The Social Security Trust Fund was close to insolvency and Congress enacted a series of bills that cut Social Security benefits and raised taxes.”
There could be ‘no COLA payable in 2024’
Johnson warns that a recession in 2023 could have severe consequences for your Social Security benefits.
The majority of funding for the benefits comes from payroll taxes, but high unemployment during an economic downturn could “cause a significant worsening in the finances of the Social Security Trust Fund.”
Last October, the Bank of America forecasted that the U.S. economy could lose about 175,000 jobs a month in the first quarter of 2023. More recently, Bank of America CEO Brian Moynihan told CNN that an economic pullback shouldn't be a big surprise, given the uncertainty in the global economy.
“In addition, an abrupt turn to deflation could mean that there may be no COLA payable in 2024,” Johnson says.
Read more: Here's how much the average American 60-year-old holds in retirement savings — how does your nest egg compare?
2023 COLA is the biggest since 1981
The new COLA would lift the average retiree benefit by over $140 a month.
The Centers for Medicare & Medicaid Services also announced in September that Medicare premiums will drop just over $5 a month to $164.90 next year — the first time Part B premiums have decreased in a decade.
However past COLAs haven't always kept up with inflation. Seniors received a 5.9% COLA in January 2022, but Johnson calculates that the benefit fell short by 50% on average.
“We won’t know the bottom line until we learn what inflation will be in 2023,” she says.
Get expert financial advice
Setting yourself up for a comfortable retirement is nerve-wracking — especially with a 6.5% inflation rate and potential recession peeking around the corner.
The Federal Reserve says only 40% of non-retirees thought their retirement savings were on track as of 2021.
One solution is to find a financial adviser who can help you navigate your finances and make sure your assets are safeguarded.
Researching and calling multiple financial planners can be a time-consuming hassle, but there are ways you can easily browse vetted advisers that fit your needs. Booking a consultation is free and only takes a few minutes.
If you're unsure of how to safeguard your savings during a recession, the time to find a financial adviser is now.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.