Social Security: The Drawback of Cost-of-Living Adjustments

I’m sure everyone is well aware by now that inflation hit a 40-year high of 9.1% earlier this year. In the past few months, this has decreased but is still sitting at 7.1% according to the November report released by the U.S. Bureau of Labor Statistics.

Now, what does this have to do with Social Security benefits? Well, the Social Security Administration (SSA) uses cost-of-living adjustments (COLA) to offset inflation. Back in October, the SSA announced that the COLA for 2023 would be 8.7%. This is a good thing, right? Yes and no. For the yes answer, this means you are getting an 8.7% raise in payments. So, if you received $1,000 a month from Social Security in 2022, you would now receive $1,087 per month or an increase of $1,044 over the course of a year.

Now, for the no answer. Social Security benefits, at inception, were exempt from Federal Taxes. Back in 1983, Congress amended the Social Security Act to subject up to 50% of the benefits received to federal income taxes. Then in 1993, Congress established an additional threshold of up to 85% of benefits received to be taxable. The problem is that the income thresholds have not increased over the years to match inflation. So, while more people have been receiving regular cost-of-living adjustments, more people have crossed into those higher income thresholds and are actually getting taxed more.

For those that receive Social Security benefits and have additional income from work pensions, a 401k, or a traditional IRA, taxes in 2024 may look a little different. If you are single and your combined income is between $25,000 and $34,000 you may be taxed up to 50% of your Social Security Benefits. If that income is greater than $34,000 you may be taxed up to 85% of those benefits. For married taxpayers, that number slightly increases to between $32,000 and $44,000 for the 50% tax. And if the combined income is greater than $44,000 you may be taxed up to that 85% mark.