Higher inflation is expected to increase the 2023 Social Security cost-of-living adjustment, or COLA, by a percentage not seen in 40 years, which can be read as good news for retirees who are suffering under soaring prices.
The bad news? That generous bump could also push Social Security recipients into higher tax brackets, resulting in about half of all households paying taxes on their benefits.
The Social Security Administration will announce the actual COLA for 2023 in October. But the projected adjustment will raise the average Social Security retirement benefit of $1,656 by $144.10, according to the Senior Citizens League, a group that represents seniors.
“The taxes are burdensome,” said Senior Citizens League’s Social Security and Medicare policy analyst Mary Johnson. “It’s really vital income being taxed away. It can be burdensome with serious repercussions on how people access what they need – their housing and food resources, which affects their health.”
If you file an individual tax return and your income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. The percentage rises to 85% if your income is more than $34,000.
For couples filing jointly with between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. It jumps to 85% if your joint income is more than $44,000.
These are the same income benchmarks as in 1984 when the tax on Social Security benefits first emerged.
Those benchmarks have not been adjusted for inflation, meaning that now about half of recipients will pay taxes on their benefits, Johnson said. That’s up from about 10% in 1984, according to the Social Security Administration.
Had the income thresholds been adjusted for inflation the $25,000/single filer level would today be about $72,662 and the $32,000/joint filer level would be about $93,008, Johnson said, based on the inflation calculator maintained by the Bureau of Labor Statistics.
“The point is, it’s no longer fair. It’s not working well for older taxpayers,” Johnson said. “People may not be thinking ahead yet for tax filing purposes, but they need to.”
The COLA also affects cost sharing on Medicare Part B premiums, though the income threshold is higher at above $91,000 for individuals and $182,000 for couples.
Andrew Biggs, senior fellow with the American Enterprise Institute, argued that the income threshold for taxing Social Security benefits was intentionally left flat so more people would eventually pay taxes on half their benefits.
“Some people will be outraged by it. But the income thresholds – the reason they’re not indexed – is so people will be phased in over time. The intent was that over the years, people would pay income taxes on half of their benefits. That’s because they didn’t pay taxes on the employer-contribution portion,” Biggs said.
Biggs said the COLA increase will not trigger higher taxes for the lowest income people.
“The people who need the COLA increase the most – the bottom half of the population – are getting lots of protection against inflation,” Biggs said.
“The higher income retirees have protection. It’s the middle-income people where it gets trickier,” Biggs said.