Social Security's Largest Raise Since 1982 Comes With Bad News for Retirees

Social Security benefits will get an 8.7% cost-of-living adjustment in 2023, the highest in four decades, because inflation rocketed to a four-decade high. It's the fourth-largest raise in history, and it's the largest raise for retired workers in 30 years. The historic COLA might come with two unpleasant surprises.

Retirees need to know the details.

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More retired workers will owe federal income tax on Social Security benefits

Social Security benefits were not taxed before. Congress changed the law in 1983 to allow the taxation of benefits for people with high incomes. In 1993 a higher threshold was added.

The thresholds have not been adjusted for inflation. Benefits have been adjusted for inflation Since 1983, the COLA has pushed more people over the income thresholds. When the law went into effect, less than 10% of beneficiaries owe taxes on Social Security income, but that figure is now around 50%, and a big COLA in 2023 will add to the problem.

Social Security beneficiaries who derive all of their income from the program will not pay taxes. Those with additional sources of income may be on the wrong side of the income thresholds next year.

The tax liability depends on (1) filing status and (2) combined income, which is defined as the sum of modified adjusted gross income plus half of social security benefits. The details are listed here.

• Single taxpayers: If combined income falls between $25,000 and $34,000, up to 50% of Social Security benefits are taxable; if combined income exceeds $34,000, up to 85% of Social Security benefits are taxable.

• Married taxpayers (filing jointly): If combined income falls between $32,000 and $44,000, up to 50% of Social Security benefits are taxable; if combined income exceeds $44,000, up to 85% of Social Security benefits are taxable.

There are two options for beneficiaries who owe taxes. They can either make quarterly estimated payments to the IRS, or they can request that federal taxes be taken away from their benefits.

Social Security benefits are also taxed in 12 states.

The Social Security trust fund may be depleted earlier than anticipated

Social Security costs are rising more quickly than revenue because of the aging Baby Boomer population. The Social Security program had a $56 billion deficit in 2021.

What do you think? According to the Board of Trustees, the Social Security trust fund is on track to run out of money in 2036. If Congress fails to resolve the problem, it could lead to a pay cut for retirees. Income taxes wouldn't cover 80% of scheduled benefits if the trust fund depletes.

The Board of Trustees did not anticipate an increase in the cost of living in the future. Projections are based on the assumption that benefits will rise by no more than 5.14%. The large Social Security COLA could cause the Social Security trust fund to go broke.

The politicians in Washington are aware of the problem and have proposed solutions.

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