Social Security COLA Increases Could Cost Seniors Money — Here’s How

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This year’s soaring inflation rate likely means that the 2023 cost-of-living adjustment (COLA) for Social Security beneficiaries will be the highest in decades, with one seniors advocacy group estimating that the 2023 COLA could push above 10%. That should be good news for retirees who are having a hard time making ends meet, but it could be bad news for others.

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The reason is that a sharp COLA increase would push some Social Security beneficiaries into a higher tax bracket, increasing their tax liability.

As GOBankingRates reported last week, the non-partisan Senior Citizens League estimates that the COLA for 2023 will be 10.5%, based on inflation numbers showing that the Consumer Price Index in June rose 9.1% year-over-year.

A 10.5% COLA hike would increase the current average retiree benefit of $1,668 by $175.10. That could have negative tax consequences unless lawmakers change the income thresholds for Social Security beneficiaries.

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The amount of Social Security benefits exempted from tax hasn’t changed since 1984, the Washington Times reported. Under the current structure, retirees owe tax on benefits if their income and payments total more than $25,000 for a single person or $32,000 for a married couple. Estimates from the Congressional Budget Office show that the share of Social Security benefits that must be taxed will increase by 10% this year and another 10% in 2023.

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Tens of thousands of retirees who have not paid taxes on their benefits in the past might have to start doing so in 2023, according to Mary Johnson, the Senior Citizen League’s Social Security and Medicare policy analyst.

“Because the income thresholds are not adjusted like ordinary tax brackets, these once-in-a-lifetime COLA increases could lead to permanently higher taxes for many retirees,” Johnson said in an email statement to GOBankingRates.

Higher incomes also can lead to a loss of income-adjusted Medicare health and prescription drug benefits for low-income beneficiaries, as well as reduced Supplemental Nutrition Assistance Program (SNAP) benefits.

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