Social Security COLA will jump by 8.7% in 2023, biggest hike in 40+ years

Americans collecting Social Security will receive an 8.7% cost-of-living adjustment in 2023, the Social Security Administration announced on Thursday. This will be the largest increase since 1981, when the COLA rose by 11.2%.

“A Social Security COLA adjustment of 8.7% is rare — enjoy it now,” says Mary Johnson, a policy analyst at the Senior Citizens League. “This may be the first and possibly the last time that beneficiaries today receive a COLA this high.”

The adjustment will begin with benefits payable to more than 65 million Social Security beneficiaries in January. Increased payments to more than seven million Supplemental Security Income beneficiaries will begin on December 30 this year.

Related: Could 2023 Social Security COLA hit 9%?

The higher payments come in response to the hottest inflation in four decades. Prices paid by U.S. consumers surged 8.2% in September from the previous year, the Labor Department reported on Thursday, despite an aggressive campaign by the Federal Reserve to cool inflation. The annual Social Security adjustment is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, which jumped 8.5% over the past year.

The COLA adjustment has several implications for financial advisors and their clients. Although the increase will enable recipients to keep pace with inflation, it also could push moderate-income retirees into the territory where some (or more) of their Social Security benefits are subject to the federal income tax. Others may lose eligibility for food stamps or other assistance programs.

Changes to the earnings limit may affect the increasing number of retirees who have returned to the workforce. The maximum amount of earnings subject to the Social Security tax will increase to $160,200. The earnings limit for workers who are younger than full retirement age will increase to $21,240, while the limit for people reaching their full retirement age in 2023 will increase to $56,520. There is no limit on earnings for workers who are full retirement age or older for the entire year.

Reaction to the announcement among senior advocacy groups was mixed.

“The guaranteed benefits provided by Social Security, including the annual COLA, are more crucial than ever as high inflation remains a problem for older Americans,” says Jo Ann Jenkins, CEO of AARP. “The automatic adjustment is an essential part of Social Security that helps ensure the benefit does not erode over time due to rising prices.”

However, Ramsey Alwin, president and CEO of the National Council on Aging, said many retirees will continue to struggle despite the COLA increase.

“While this increase is historic and needed, it is also inadequate for the millions of older Americans who face skyrocketing housing and healthcare costs across the country,” he says. “People aged 65-plus are the only group for which poverty increased last year, according to the U.S. Census Bureau. We now have almost six million older adults who cannot age with dignity. This is a clear indication that our nation’s support programs are not meeting today’s realities.”