Social Security’s 2023 COLA Increase: What You Need to Know About Future Benefits

Social Security Retirement and Supplemental Security Income (SSI) benefits will increase by 8.7 percent in 2023, the most significant increase since the 1980s. The last time the cost-of-living adjustment (COLA) was higher was in 1981, when the increase was 11.2%. The increase, due to inflation, will result in a Social Security benefits increase of an extra $146 per month, or $1,827 for 2023, up from $1,681 in 2022.

Social Security benefits are adjusted yearly for inflation based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W index measures the monthly price change in a market basket of goods and services, including food, energy, and medical care. With the current inflationary prices, the Social Security Cost of Living Adjustment may feel like little for many Americans receiving monthly benefits.

How Social Security retirement is funded

Social Security funds through a payroll tax of 12.4 percent on eligible wages; employees and employers each pay 6.2 percent, and self-employed people pay 12.4 percent. The maximum work income subject to the Social Security tax is currently $147,000 for 2022 but will increase to $160,200 for 2023.

Today’s workers fund Social Security for those currently receiving benefits; each working generation supports the past generation ahead of them. Our decreasing younger generations and aging population are a reason for concern that the Social Security fund may not have sufficient funds in the future to pay out at the current benefit rate.

Is Cost of Living Adjustment enough to keep up with inflation?

Inflation risk is the risk that will reduce the future real value (after inflation) of an investment, asset, or income stream will be reduced. Inflation risk may impact your savings and investments in these ways:

• Since prices increase over time and more significantly during high inflation, you cannot buy as much as before.
• Your net worth may decrease because inflation reduces your purchasing power.
• Inflation hurts the performance of investments with a set annual return. Such as a bond or certificate of deposit (CD), since you receive the same return each year.

Fixed-Indexed annuities may provide a strategy for inflation

Fixed-Indexed annuities are an appropriate strategy for retirees seeking income and safety to offset inflation risk. A Fixed-Indexed annuity is a contract issued and guaranteed by an insurance company and backed by the insurance company’s claims-paying ability. Here are other integrated features of Fixed-Indexed annuities:

• They provide growth potential through the features of their sub-accounts, which helps determine the performance (net of expenses) and the amount of money to be paid out. This unique feature helps provide growth, even during periods of inflation, and payments may increase over time.
• FIAs offer a tax advantage by allowing the owner to save more through tax deferral by offsetting their income. They have higher contribution rate limits than traditional pre-tax retirement savings accounts.
• FIAs may help smooth out a portfolio’s return pattern over time, regardless of market performance and inflation.
• They are tax-deferred accumulation vehicles. Whose growth benchmarks to a stock market index rather than an interest rate.

Inflation-protected annuities (IPA)

Inflation-protected annuities (IPA) are indexed for inflation risk through an inflation rider which is capped for inflation. IPAs earn more when inflation goes up and less when inflation goes down. However, this inflation rider feature comes with an additional price. Your financial professional can help determine if an indexed inflation rider is appropriate for your situation.

Contact our office if you have any questions about Social Security benefits. The 2023 Cost of Living Adjustment increase. Or questions on how Fixed-Indexed annuities may provide a strategy for inflation depending on your situation and your financial plan.

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Disclosures:

The source(s) used to prepare this material is/are believed to be true, accurate and reliable, but is/are not guaranteed.

This article is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not intended to provide specific legal or tax advice and cannot be used to avoid penalties or to promote, market, or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney.

An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Consult a tax advisor for specific information.

In addition we are very hopeful for an opportunity to discuss your retirement strategy. There is no cost or obligation when talking with us. We look forward to working with you soon. So we can help you lower your stress over your retirement years. Contact us today.