Inflation pushes Social Security COLA to 8.7% in 2023.
COLA, which stands for cost-of-living adjustments, is an increase in Social Security benefits to counteract inflation. The Social Security Administration uses the CPI-W index (Consumer Price Index for Urban Wage Earners and Clerical Workers) to calculate inflation and has adjusted benefits payments annually for inflation since 1975 to ensure the approximately 70 million retirees and disabled people who receive Social Security won’t see their benefits eroded by inflation. This year’s COLA is 5.9% which cannot pace up with the high inflation and thus pushed the COLA to 8.7% in 2023, which is the largest COLA in four decades. The average monthly social security benefits check for retirees will rise to $1814 in 2023 from $1669 in 2022, accounting for an 11.2% increase–the largest increase since 1981.
In the US, Social Security replaces a percentage of your pre-retirement income based on your lifetime earnings and is financed through a dedicated payroll tax. In order to increase the COLA, the maximum amount of earnings subject to the Social Security tax will increase to $160,200 in 2023, from $147,000 this year. The COLA is vital for some Americans due to their financial situation. According to an AARP analysis of recent government data, over 40% of Americans aged 65 and older rely on Social Security benefits for half or more of their income, and about 20% of them depend on the benefits for 90% or more of their income. While most of the private sector does not have a cost-of-living adjustment in the pension, other retirement incomes, such as 401k, have declined this year with the poor situation in the market, causing financial trouble for some retirees. According to the nonprofit Committee for a Responsible Federal Budget, the 8.7% increase in COLA is likely to speed up the date of insolvency for the Social Security trust fund.
When the insolvency happened, predicted in 2034, the fund’s reserves will run out, leaving the system reliant on incoming tax revenue. One major consequence would be those funds will only provide enough benefits to cover 77% of the scheduled benefits unless Congress intervenes.
https://www.wsj.com/articles/social-security-benefits-to-increase-in-2023-11665665206
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