While many working toward retirement dream of a post-work life filled with travel, time with family and carefree living, the reality for most retirees involves carefully balancing between fixed incomes and rising costs.
As a result, the 70 million Americans who receive Social Security benefits tend to stick to a pragmatic playbook.
So, when the news popped that Social Security benefits will get a cost of living boost of 8.7% in 2023, many breathed a sigh of relief.
After all, when prices on gas, groceries, rent and heat have jumped more than 8% this year, the extra $140 in benefits per month on average will certainly make a difference for those who rely on the program to cover essentials.
Yet, following the brief respite, many turned back to their household cash flow calculations, assessed how things might look in the New Year and reassumed a wary mindset.
“Whenever there’s a raise, retirees are happy, but they also know that the cost of living is aggressively eating it away,” said Chrisanna Elser, financial planning quality assurance specialist with BOK Financial®. “Retirees have a much different mindset because they’re using their savings to fill the gap between their desired spending and their Social Security check.
“Most of the time the annual raise is already spent because they’re playing catch up where inflation has left its mark,” she added.
Benefits a moving target
In 1975, the Social Security Administration started giving retirees an annual cost of living increase based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, known as CPI-W. After lingering for years at relatively modest levels, the benefit increased 5.9% in 2021 and spiked this year to a level not seen since the early 1980s.
As many as 15% of older Americans rely on Social Security payments to cover more than 90% of their regular monthly expenses. The rest manage a matrix of retirement plan distributions, income from investments and the occasional pension plan benefits. Early retirees who continue to work can also earn up to $21,240 in 2023 without cutting into their Social Security benefits.
Those benefits may be initiated at any point between age 62 and 70. For those born in 1960 and later, however, monthly benefits at 62 are 30% lower than what would be paid out at 67, which is full retirement age, according to the Social Security Administration. And holding off until age 70 boosts the monthly deposit by 24%.
Despite the considerable difference in monthly income, 48% of non-retired individuals in a recent survey said they planned to start collecting benefits between 62 and 65, while 11% said they expected to wait until 70.
“To figure out what’s best, we really do want to see a full financial plan because there are so many variables such as your life expectancy, your health and your other assets,” Elser said. “If you’re married, the difference in your ages or incomes can also be a factor. It may make sense to start taking benefits on one spouse earlier and put off the other until 70.
“Plus, with the stock market down and a job market that’s looking good, maybe it behooves you to remain in the workforce and wait for the market to recover.”
Medicare part of the equation
Another factor in the equation: Medicare, the government-run health insurance program for Americans 65 and older.
For 2023, the standard monthly premium for Medicare Part B, which covers many common healthcare costs, will decline $5.20 from this year. The annual deductible will also drop $7 per beneficiary, while the annual deductible for Medicare Part A, which covers many hospital expenses, will increase $44.
Elser said the dip in Plan B costs has minimal out-of-pocket impact when retirees factor in all of their healthcare expenses.
“Retirees are still taking the costs full bore on hearing, dental and vision care—which are not covered by Medicare—and that’s where inflation is really hitting them,” she said. “Plus, because Medicare was extremely stressed during COVID and remains challenged, many are nervous that there will be a huge increase, maybe next year or the year after.”
A political minefield
Social Security is a “third-rail program” that can inflict sustained political pain upon any elected official who tinkers with the mechanics, Elser said. Still, some suggestions for easing the burden appear to be gaining traction.
Healthcare cost dynamics have prompted some legislators to propose that Social Security’s annual cost of living adjustment be based on the CPI-Elderly, which they contend better reflects a retiree’s costs than the CPI-W. Elser said the CPI-Elderly emphasizes health care and other expenses over entertainment, housing and transportation costs.
“It’s the same base numbers as in the CPI-W, but the categories are weighted differently to better reflect the areas more impacted by inflation,” she said.
After this year’s increase was announced, questions arose around the Social Security Administration Trustees’ June report that estimated the program’s reserves will last until 2034.
Specifically, eliminating the age 62 option and extending full retirement age to 70 for today’s younger workers appears potentially politically feasible. So does a higher maximum wage limit for Social Security taxes, which is set at $160,200 of income in 2023.
Increasing the earned income tax rate collected for Social Security and Medicare, which has been stuck at 7.65% for both the employee and employer since 1990, could help to build up the reserves. Specifically, this year’s Trustees report said an additional 3.41% from the employee and employer would offset the current deficit.
“Nobody wants to say it, but they really need to go after that tax rate,” Elser said. “Plus, as Congress looks at the millennial generation, they see a great big workforce funding the program, but they know that will be a great big population that the country will eventually have to fund benefits for.”