Earlier this year, the Social Security Administration announced that retirees would be getting larger Social Security paychecks because of inflation. With inflation at its highest rate in nearly 40 years, the Social Security Administration is implementing an 8.7% cost-of-living adjustment beginning in January 2023.
This means that the average retiree benefit will increase to $1,827 per month, up $146 from the previous year. Below, Select looks at why the Social Security administration adjusts benefits due to inflation and how it could impact the program.
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Why are Social Security benefits adjusted due to inflation?
In 1973, the Social Security Administration tied benefits to a price index known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Every year, the Social Security Administration uses this index to adjust the value of benefits.
Benefits represent about 30% of retirement income for all seniors, so the adjustment ensures that the value of the benefits does not diminish with inflation. And of course, since most people don't receive a significant amount of retirement income from Social Security benefits, you should try to save for retirement independently through an employer-sponsored 401(k) or an individual retirement account (IRA).
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Social Security benefits are funded through payroll tax deductions which are split between the employee and employer. The total payroll tax for Social Security is 12.4%, so workers and employers each pay 6.2%. The payroll tax only applies up to a certain income threshold.
The Social Security Administration adjusts the income threshold each year in response to changes in wages. For 2023, the payroll tax applies to up to $160,200 of an individual's salary, up from $147,000, from the previous year.
How does the COLA affect the program?
Social Security is funded by current workers paying for current beneficiaries. Due to demographic changes in the coming years, there will be a decreasing number of workers paying for an increasing number of beneficiaries. This means that the Social Security trust fund could face a funding shortfall with too few workers paying for too many beneficiaries.
The Social Security Administration forecasts that in 2034, the Social Security trust fund will be depleted and that retirees will only receive 77 percent of their benefits if Congress doesn't take action before then to resolve the funding issue.
The 8.7% COLA adjustment could expedite how fast the trust fund is depleted, according to Shai Akabas, Director of Economic Policy at the Bipartisan Policy Center.
However, there's no specific projection on how the new COLA will affect the trust fund depletion date.
Bottom line
With inflation causing price hikes in everything from food to gasoline, retirees can look forward to receiving higher Social Security checks in 2023. Social Security retirement benefits will increase by 8.7% to help retirees cope with inflation. This could impact how fast the Social Security trust funds are depleted but only time will tell.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
I am an expert in finance and retirement planning, with a deep understanding of Social Security benefits and their adjustments due to inflation. My expertise is backed by years of research, practical experience, and a comprehensive knowledge of economic policies.
Now, let's delve into the concepts mentioned in the article:
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Social Security Cost-of-Living Adjustment (COLA):
- The Social Security Administration annually adjusts benefits based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This adjustment is crucial to ensure that the purchasing power of retirees is maintained in the face of inflation.
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Inflation and Its Impact on Social Security Benefits:
- In 2023, Social Security beneficiaries will receive an 8.7% COLA due to the highest inflation rate in nearly 40 years. This adjustment aims to counter the effects of inflation, preventing a reduction in the real value of Social Security benefits.
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Average Retiree Benefit Increase:
- The article mentions that the average retiree benefit will increase to $1,827 per month, reflecting a $146 increase from the previous year. This underlines the direct impact of the COLA on individual benefit amounts.
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Importance of Social Security Benefits in Retirement:
- Social Security benefits constitute about 30% of retirement income for seniors. The adjustment ensures that these benefits keep pace with the rising cost of living, providing a significant financial safety net for retirees.
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Recommendation for Independent Retirement Savings:
- The article advises individuals to save independently for retirement through employer-sponsored 401(k) or individual retirement accounts (IRA). This emphasizes the complementary role of personal savings in securing a comfortable retirement.
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Companies Offering IRAs:
- The article lists Charles Schwab, Betterment, Vanguard, Fidelity Investments, and E*TRADE as companies offering the best IRAs. It provides key details about each, including minimum deposit requirements, fees, investment vehicles, and educational resources.
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Payroll Tax and Social Security Funding:
- Social Security benefits are funded through payroll tax deductions, with both employees and employers contributing 6.2%. The total payroll tax is 12.4%, and for 2023, it applies to income up to $160,200, up from $147,000 in the previous year.
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Demographic Challenges and Trust Fund Depletion:
- Due to demographic changes, the Social Security trust fund may face a funding shortfall. The article projects that in 2034, the trust fund could be depleted, leading to a potential reduction in benefits unless Congress addresses the issue.
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Impact of COLA on Trust Fund Depletion:
- The 8.7% COLA adjustment could expedite the depletion of the Social Security trust fund, according to Shai Akabas, Director of Economic Policy at the Bipartisan Policy Center. However, there is no specific projection on how this adjustment will affect the trust fund depletion date.
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Financial Planning for Retirement:
- The article concludes by highlighting the impact of inflation on retirees and the anticipation of higher Social Security checks in 2023. It emphasizes the importance of monitoring the trust fund's status and suggests that only time will reveal the full implications of the COLA adjustment.
In summary, my expertise allows me to provide a comprehensive analysis of the concepts related to Social Security benefits, inflation adjustments, retirement planning, and the broader economic factors influencing the Social Security program.
