This new year has got a lot of people worried about their finances. And why not? Inflation is on the rise, and tax credits are getting lesser. There’s almost no respite anywhere at all. However, if you are a Social Security beneficiary, this year could be a huge financial turnover with the new Social Security COLA boost. The main objective of this boost is to provide higher income to retirees struggling with rising costs due to inflation.
But that’s not all.
While this is great news, it is only a partially welcomed solution because of the cons that come with it. A closer look at this new twist shows that the Social Security COLA boost could put more financial strain on the Social Security program. Read along to discover all you need to know about the new boost on Social Security COLA.
How Much Will The Social Security COLA Boost Be?
Amid high inflation, Social Security beneficiaries will enjoy an 8.7% increase in their benefits from the beginning of 2023 to boost their cost of living- the highest it has been in 40 years. This recent increase means that monthly benefit checks will go up by:
- $146 for individual retired workers
- $238 for a retired couple
- $282 for people with children receiving survivors’ benefits
- $137 for people without children receiving survivors’ benefits
- $119 for the disabled workers
How Does The Social Security COLA Boost Affect Your Taxes?
According to tax experts, one of the most common misconceptions about Social security is that it is not subject to taxes. However, Social Security is like other government benefits, which means it is taxable. Here’s how the taxes work:
- Single filers earning $25,000 and below and couples earning $32,000 and below don’t pay taxes on their Social Security benefits.
- Single files earning between $25,000 and $34,000 and couples earning between $32,000 and $44,000 pay taxes on up 50% of their Social Security benefits.
- Single and joint filers earning more than the threshold above pay taxes on 85% of their Social Security benefits.
- To make this easier, just remember that 15% of Social Security benefits (about $3,200 in 2023) will always be tax-free.
What Are The Effect Of This New COLA Boost
Diminished Social Security
The Social Security COLA boost may be a short-term solution to inflation now, but it comes at the detriment of diminished Social Security for current and future retirees. Since 2010, the social security system has been bringing in less revenue than it sent out in benefits and making up for the shortfall with its reserves.
The Social Security system is funded majorly by current workers’ payroll taxes. The high reliance on workers’ wages itself is a huge disadvantage to the Social Security system.
The average worker’s wages have only increased by 4.1% over the past year. The average number of workers has reduced by over 2.8 million compared to the pre-pandemic employment-to-population ratio. This means that Social Security revenues have only increased below half of the rate of its newly announced expenditure increase.
The Social Security Trust Fund Will Soon Be Exhausted.
The Social Security benefit in 2021 was paid to 65 million recipients, and now there is another activated boost plan. How long will it take before the funds get exhausted?
Well, pretty close. Social Security has been projected to exhaust by 2034 under the current laws of Social Security. According to the 2023 Social Security Trustee report, what follows this exhaustion is a 23% cut in social security benefits. This means that Americans who are 55 or younger today will only enjoy a partial Social Security benefit in the future.
With this new Social Security COLA boost, the Social Security Trust Fund may be exhausted sooner than expected. When Social Security runs out of money, retirees won’t be able to take out a $1,750 benefit increase. Instead, the average benefit boost will be subjected to a $5,040 benefit cut.
An Increase In Social Security Payroll Contributions
Since the cost of Social Security COLA boost is on the rise, this will be partially offset by higher taxes on workers. The cap for Social Security tax has increased significantly from $76,200 in 2000. Now, the maximum amount of earnings subjected to the 6.2% Social Security tax will increase from $147,000 in 2022 to $160, 200 in 2023.
The Social Security trustees have also reported that maintaining the current benefit levels would require an immediate increase in payroll tax from 12.4% to 15.8%. This means an additional $2,400 in Social Security taxes annually, while median households with $70,800 in earnings will have to pay $11,200 in total Social Security taxes.
An Older Full Retirement Age
Full retirement age(FRA), which is also the age at which you are eligible to claim 100% of Social Security benefits, has increased from 65 to 66 years and 6 months. This age will rise incrementally over the coming years to 67.This change has been mandated by Congress in 1983 to strengthen Social Security finances. The Congress has cited that these changes would improve the health of older people and increase life expectancy.
The law for full retirement age has remained 65 since the inception of Social Security in the 1930s but has increased to 66 for citizens born between 1943 and 1954, and for those born in 1955, it has been raised to 66 and 2 months. For those born in 1956, it’s 66 and 4 months. For 1957, it’s 66 and 6 months. It keeps increasing until it settles at 67 for people born in 1960 or after.
Social Security COLA boost is both good and bad news. While it would help a lot of senior citizens who aren’t healthy enough to work during this biting inflation, it could also spell tax doom. Remember that if you receive Social Security, you may pay income taxes on up to 85% of those benefits. This is why you need a tax strategist like Tax Goddess to help you minimize your taxes and maximize the benefit you are entitled to. If you want to enjoy your Social Security benefits without tax burdens, reach out to us at Tax Goddess.