Barron Editor-in-Chief Kristen Bellstrom is responding to younger generations preparing for the prospect of fewer Social Security benefits.
Social Security recipients will soon receive the largest increase in their benefits in more than four decades, with the pension program projected to increase by 8.7% through 2023.
The increase, known as the cost-of-living adjustment (COLA), is the largest since 1981, when recipients saw an 11.2% increase. It will add about $140 to the average monthly benefit.
More than 66 million Americans who receive Social Security will start receiving the larger payments beginning in January, according to the Social Security Administration.
The higher payments came in response to the hottest inflation in four decades: Prices paid by US consumers hovered around a four-decade high from August to October, the period when COLA is calculated.
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More than 64 million Americans who receive Social Security will begin receiving the larger payments beginning in January. (Kevin Dietsch/Getty Images/Getty Images)
“An 8.7% Social Security cost-of-living adjustment is rare — enjoy it now,” said Mary Johnson, policy analyst at the Senior Citizens League. “This may be the first and possibly the last time that beneficiaries will receive such a high COLA today.”
Still, decades of performance gains aren’t always good news for recipients, according to Johnson.
Higher Social Security payments are a bit of a catch-22. They can reduce eligibility for low-income safety-net programs like food stamps and push people into higher tax brackets. In essence, bigger payments don’t necessarily translate to more money in people’s pockets.
Social Security benefits are taxable when one-half of the benefit amount plus all of your other income, including tax-free interest, exceeds $25,000 if you are single, head of household or eligible widow(er), or $32,000 if you are married and filing jointly.
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Some seniors may never have owed taxes on their benefits, but that’s likely to change next year when they file their tax returns. In fact, the Congressional Budget Office has estimated that the share of taxable Social Security benefits could increase by 10% this year and another 10% in 2023. Overall, total income taxes paid on that money are expected to increase by 37% a year.
Additionally, the Social Security Trust is estimated to receive more than $45 billion in tax benefits in 2022 — a significant increase from 2021, when it raised about $34.5 billion, according to the program’s trustees.
“High-inflation COLAs can have some very long-term implications,” Johnson said. “It’s like a no-win situation.”
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Higher monthly income can also reduce seniors’ eligibility for low-income programs like SNAP, the Supplemental Nutrition Assistance Program (food stamps).
Benefit increased 5.9% in 2022, representing an average monthly increase of $92 for retired Americans, bringing the total to $1,657, the Social Security Administration announced last year.
Shoppers at a grocery store in San Francisco, California, May 2, 2022. (Photographer: David Paul Morris/Bloomberg via Getty Images/Getty Images)
However, rising inflation has already wiped out the entire increase, with recipients losing 46% of their spending power — or about $508 — every month of the year, according to the Senior Citizens League.
In addition, the unusually large COLA could bring forward the Social Security bankruptcy date by draining funds more quickly.
The average monthly pension would need to increase by $417.60 for retirees to maintain the same level of purchasing power as in 2000.
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