Social Security recipients could receive the biggest increase yet in benefits next year, as their cost-of-living adjustment could hit a 40-plus-year high, according to estimates from the Senior Citizens League, a nonpartisan seniors group.

Based on Consumer Price Index data for urban wage earners and clerical workers through June (data released today by the Bureau of Labor Statistics), it appears the COLA for 2023 will be 10.5%, the highest since 1981, when it was 11.2%, according to Mary Johnson, a Social Security policy analyst at the Senior Citizens League who spoke with Financial Advisor magazine. The increase is 1.9 percentage points more than the 8.6% estimate in May as inflation continues to accelerate and outpace the expectations of both economists and the public at large.

The BLS data showed that the CPI index rose 1.3% for the month of June and 9.1% from a year ago.

Johnson noted that if inflation runs “hot” or higher than the recent average, the adjustment could hit 11.4%. On the other hand, it also could stall at 9.8% if inflation runs “cold” or lower than the recent average, she said.

The projected 10.5% increase in the COLA would add $175.10 to the average retiree benefit of $1,668, Johnson noted.

“A high COLA will be eagerly anticipated to address an ongoing shortfall in benefits that Social Security beneficiaries are experiencing in 2022 because inflation is higher than their 5.9% COLA,” she said. 

But while the high cost-of-living adjustment is welcomed, Johnson said it does not take into account some key costs faced by retired and disabled Social Security recipients. For one thing, it does not account for increases in the Medicare Part B premium, she said, explaining that this premium jumped by 14.5% in 2022, one of the highest increases in the program’s history. “The Part B premium is automatically deducted from Social Security checks, and in 2022 beneficiaries are still smarting from this.”

Johnson also pointed out that the higher income also often leads to cuts in income-related benefits for low-income people and leads to higher taxes for individuals with incomes above $25,000 and married couples making more than $32,000. “This tax impact is not felt until tax time (starting in April 2023 and 2024). The Senior Citizens League believes tens of thousands of retirees who have not paid taxes on their benefits in the past may discover they must start doing so in 2023,” she said. “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.”

Additionally, Johnson said, the extra income can lead to a loss of income-adjusted Medicare health and prescription drug benefits for low-income beneficiaries. “Higher income individuals can wind up paying higher Medicare Part B and Part D benefits,” she said.