Despite its widespread acceptance since its inception in 1935, Social Security was never meant to be a retiree's sole or even primary source of financial support. Instead, it was created to help those who had not been able to save enough for retirement.
Today, everything is quite different. These days, planning for your Social Security benefits is a must if you want to ensure you have enough funds to live comfortably when you retire. Now, due to the record high inflation, social security is getting an 8.7% hike to their benefits, the highest increase in 40 years.
What you need to know about the new Social Security benefits increase/ cost of living adjustment information
In November 2022, a retired beneficiary could expect to receive a $1,551.66 monthly payout. To keep up with inflation, the Social Security Administration (SSA) periodically raises benefits through a cost-of-living adjustment (COLA). In 2022, the cost-of-living increase for those receiving Social Security and Supplemental Security Income (SSI) was 5.9%. The COLA increase for beneficiaries in 2023 is 8.7%.
The Social Security Administration announced the shift on October 13, 2022. After this change goes into effect in 2023, recipients will see an average monthly benefits rise of more than $140. In 2023, Social Security payments will have increased by 8.7 percent, the fourth-largest increase since the program automatically adjusted for inflation in 1975.
The Social Security Administration reports that the average monthly retirement benefit will increase by $146 per month to $1,827 from $1,681 due to the cost-of-living adjustment implemented in 2023.
How does income affect social security increase?
The highest income subject to Social Security taxes will rise to $160,200.
For those who haven't reached "full" retirement age, the maximum yearly salary increase is now $21,240. Benefits are decreased by $1 for every $2 income above $21,240.
Those who reach "full" retirement age in 2023 will see a rise in the earnings cap to $56,520. For every $3 earned over $56,520 until the employee reaches "full retirement age," they deduct $1 from benefits.
The annual salary cap does not apply to "full" retirement-age workers or older.
What is the purpose of cost-of-living adjustments?
The cost-of-living adjustment (COLA) was established to counteract the effects of inflation on Social Security and Supplemental Security Income (SSI) payments. The CPI-W, or Consumer Price Index for Urban Wage Earners and Clerical Workers, measures price changes in the urban consumer economy and calculates cost-of-living adjustments annually. There cannot be a cost-of-living adjustment if wages do not rise.
The CPI-W is a measure of inflation for workers that the Bureau of Labor Statistics determines within the US Department of Labor. The Social Security Administration must use this index to determine cost-of-living adjustments (COLAs) in accordance with the law.
The cost-of-living adjustment provision was included in the Social Security Amendments passed by Congress in 1972, and annual COLA increases have been automatic since 1975. Before that, benefit increases were only made when Congress passed new laws.
Automatic yearly cost-of-living adjustments were implemented by Social Security in 1975. The legislation was passed to make the adjustment, which ties the cost of living adjustments (COLAs) to the annual rise in the consumer price index (CPI-W).
This modification eliminates the negative effect of inflation on Social Security payments.
Is the social security benefits hike a boon or a bane?
The social security hike can either be a boon or a bane. It can have both positive and negative or neutral effects.
Is it sufficient?
When you think of it in a positive light, it is an extra source of income for retirees. They can get some relief with their extra income, even if it is only $146 when living on a fixed income. Moreover, it is sufficient enough to fight the rising costs caused by inflation.
"This year's hike is one of the largest in history. Of course, this is good for Social Security recipients, as it would give them enough money to adjust for the rising cost of goods." says Paw Vej, Chief Operating Officer of Financer.
Retirees can use the extra cash to pay off their debts or make money work for themselves by investing it. They can also use that money to create a savings account that they can use for emergencies.
Can it also be an insufficient increase?
However, in the negative aspect, the increase may not be enough to do more than just help adjust to inflation. This hike resulted from inflation to help manage the costs, thus the increase to $1,827 from $1,681, which is not a lot.
Paw Vej further explains, "While there's not much room for other uses of the extra cash the hike provides because of the increasing cost of goods, if retirees can lower their living costs, they can use it to boost their savings and pay off existing debts."
Social Security is a lifeline for many retirees. Statistics from the Social Security Administration show that 42% of older women and 37% of older men depend entirely on these monthly payments.
For a long time, benefit increases have lagged behind the growth in the cost of living, despite being implemented annually.
According to a study published in 2022 by the Senior Citizens League, inflation has reduced Social Security payments by 40% since 2000. To keep the same purchasing power as in 2000, the monthly benefit would need to increase by $540.
Supporters are lobbying Congress to make significant changes to the program to address the annual adjustment's persistent shortfall. Instead of basing the hike on the cost of living as experienced by urban wage earners and clerical workers, as is currently the case, many people believe it should be linked to an experimental index that evaluates inflation faced by the elderly.
A social security bonus retirees overlook
Understanding one's retirement options in the U.S. can be crucial for securing adequate Social Security. If you know how to boost your monthly Social Security payments, you can significantly increase the amount of money you receive. While the information is not exactly hidden, neither is it protected by secrecy; however, not everyone knows all the details.
These strategies only apply if you haven't begun receiving your retirement benefits. Once you start receiving your retirement benefit from Social Security, you will no longer be able to adjust the monthly amount you receive. You can only wait for the COLA rise and the $200 per month increase provided by the new bill to go into effect.
The secret Social Security bonus
It's important to double-check everything to discover the key to a higher Social Security benefit. First, there's the mandatory retirement age. There is a 30% reduction in the benefit amount if you retire at an early retirement age (ERA). To clarify, if you put in $1,000 toward a pension, you will get a $700 monthly payment.
At age 67, you can begin receiving benefits equal to 100% of your total savings. When you reach full retirement age (FRA), you'll be eligible to receive your full pension. The rise, however, continues. If you want to receive a more considerable monthly benefit, you may have to continue working until age 70. Your Social Security benefit increases by a set percentage for every year you work after age 67.
How to Collect Your $16,728 Retirement Bonus?
As previously stated, there is a significant distinction between applying for retirement at an early retirement age (ERA) and working till the age of 70. Considering the 30% reduction with ERA and the increase with working until age 70, the difference can reach the sum of $16,728 per month.
Other ways to boost your Social Security check
Retiring in this economy can be challenging. However, if you have the pertinent information to help boost your social security payments, being retired with high prices may be more manageable.
Work for a Minimum of 35 Years
The Social Security Administration (SSA) uses your total lifetime earnings to determine your monthly payment. The Social Security Administration (SSA) indexes your earnings to account for changes in average incomes since the years in which you earned them. The Social Security Administration (SSA) calculates your retirement benefit based on your 35 highest earning years' worth of salary by applying the average indexed monthly earnings (AIME).
The average will be lowered if you join the workforce late or are unemployed for any length of time since those years will be considered zeros. After 35 years, your average salary will increase because higher salary years will offset lower salary years in the past.
Earn as Much as Possible Until You Reach Retirement Age
The Social Security Administration (SSA) bases your benefit amount on your income, so the more money you bring in, the more money the SSA will give you. Some people close to retirement age try to boost their finances in various ways, such as by taking on part-time work or starting a business. Others, however, may reduce their working hours or even partially retire without considering the impact on their benefits.
Moreover, income earned after the age of 60 isn't indexed, which implies that income earned in your 60s can substitute for a year in which you had a zero or a year with lower earnings.
Delay Benefits
Most people are aware of their FRA, or the age at which they will be eligible for their full Social Security benefit. The typical FRA age ranges for retirees are between 65 and 67.
However, only a small fraction of the population knows that they can increase their Social Security benefits by 8% per year simply by waiting to start collecting them until after they reach FRA. Delaying receiving the benefit until age 70 results in a yearly 8% increase in the benefit amount. Every year that Social Security benefits are delayed, the recipient will receive delayed retirement credits (DRCs).
Claim your spouse's benefits while delaying your own
If you and your spouse reached full retirement age and were born before January 2, 1954, you may be eligible for spousal benefits while your own benefits continue to grow. When you turn 70, you can begin receiving your increased benefit.
Avoiding the Social Security Tax
You should be aware of the tax implications of increasing your income if you plan to supplement your retirement by working after you begin receiving Social Security benefits. Up to 85% of your benefit money could be subject to federal taxes.
The amount of your benefits that will be taxed is calculated by adding your non-taxable interest and half of your income from Social Security to your adjusted gross income (AGI). Up to half of your Social Security income will be taxed if your adjusted gross income is between $25,000 and $34,000 (if filing single) or between $32,000 and $44,000 (if married and filing jointly). Up to 85% of your benefits become taxable once you or your modified adjusted gross income (MAGI) exceeds $34,000 (filing single) or $44,000 (filing jointly).
If your taxable Social Security income is projected to rise, you can reduce your taxable Social Security income by diversifying your income streams.
It's a rarity, but in 2023 along with the social security hike, Medicare premiums have also dropped
Medicare Part B premiums for seniors will go down in 2023 for the first time in over a decade, according to the Centers for Medicare & Medicaid Services.
Since Medicare's inception in 1965, this will only be the fourth time premiums have been predicted to decrease.
In 2023, Medicare Part B enrollees will pay a standard monthly premium of $164.90, a decrease of $5.20 from the 2022 premium of $170.10. With effect from 2023, the annual deductible for Medicare Part B recipients will be $226, down from $233 in 2022.
It's an opportunity that only occurs once in a lifetime of retirement. In addition to this year's historically high cost of living adjustment (COLA), we have also decreased Part B premiums.
After a significant increase in 2022 that brought the average monthly premium up to $170.10 from $148.50 in 2021, the premiums have been drastically reduced.
In addition, spending on other items and services under Part B was lower than expected, leading to much more significant savings in the Part B trust fund and allowing the government to cap premium increases in the future.
The significant Social Security adjustment and the decrease in Medicare premiums for 2023 will give seniors more peace of mind and breathing room.
Bottom line
The social security hike is a big step forward, but it is also a necessity to manage inflated prices. While the recent hike may be the highest in 40 years, retirees should prepare themselves if future increases are not as high as the current one. Setting aside some money or building an emergency fund to help counter unpredictable situations is always better.
It's not a good idea for retirees to rely solely on Social Security benefits, even though there are strategies to help them get the most out of their benefits. Using supplementary retirement plans like 401(k)s and IRAs can help retirees have a more fulfilling and stress-free experience.
