Inflation dictates the annual benefit adjustment, known as the COLA, for retired Americans. The latest boost of 8.7 percent for 2023 is the highest since 1981.
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Social Security on Thursday announced an 8.7 percent cost of living adjustment for retirees, the largest inflation adjustment to benefits in four decades — a welcome development for millions of older Americans struggling to keep up with fast-rising living costs.
The cost-of-living adjustment for 2023, which will be applied to benefits in January, is based on the latest government inflation figures. The final COLA, as the adjustment is known, was released after the Labor Department announced the Consumer Price Index for September, which came in at 8.2 percent. Medicare enrollees can anticipate some additional good news: The standard Part B premium, which is typically deducted from Social Security benefits, will decline next year.
The COLA, one of Social Security’s most valuable features, will give a significant boost to about 70 million Americans next year. While retirement comes to mind when most people think about Social Security, the program plays a much broader role in providing economic security.
In August, the program paid benefits to 52.5 million people over age 65, but younger beneficiaries — survivors of insured workers and recipients of disability benefits and Supplemental Security Income, the program for very low income people — added 17.9 million people to the total, according to Social Security Administration data.
The annual inflation adjustment has been awarded since 1975 under a formula legislated by Congress. Policy experts have debated whether the current formula accurately measures the inflation that affects retirees, but there’s little disagreement on the COLA’s importance in helping beneficiaries keep up with costs.
The New York Times examined the back story of Social Security’s inflation adjustment — how it works, how it could be revised — and how it affects pocketbooks.
Social Security, the monthly benefit paid to retirees, disabled people and survivors of beneficiaries, includes an annual cost of living increase that is announced every fall. It helps seniors try to keep pace with the price increases that touch every part of the economy. The adjustment for 2023, of 8.7 percent, was announced on Thursday. People can begin claiming Social Security at age 62.
The Social Security Administration, the federal government agency that oversees the benefits, adds that money to payments that are received by more than 70 million people, mostly through electronic direct deposits. The increase takes effect in January.
The current high rate of inflation dictates the Social Security COLA.
The formula uses one of the broadest government measures of consumer prices, the Consumer Price Index for Urban Wage Earners and Clerical Workers, or C.P.I.-W.
Social Security averages the C.P.I.-W. figures from the third quarter of each year and compares that with the previous year’s figure.
Social Security is Americans’ only universal retirement benefit — nearly all retirees receive it, so interest in the annual adjustment is always high. And the COLA is one of Social Security’s most valuable features because it holds benefits steady against the erosion of rising prices.
Inflation consistently surfaces in surveys as one of the top worries of retirees — and the COLA sets Social Security apart from other retirement benefits. For example, private-sector pension plans generally do not have COLAs, although they are built into most state and local government pension plans.
“And there’s no cap,” said Nancy Altman, president of the advocacy group Social Security Works. “If inflation goes up 20 percent, you get a 20 percent increase.”
In most years, no. That’s because most seniors are enrolled in Medicare, and premiums for Part B (which covers outpatient care) typically are deducted from Social Security benefits. But this time will be different.
The COLA that was announced on Thursday is the gross figure, and that is applied to everyone receiving Social Security. But any change in the Part B premium affects the net amount of your increase.
Very often, any dollar increase in the Part B premium reduces a retiree’s COLA. And, in years when the COLA is very small — or the Part B increase is large — the premium can take a significant bite.
But in 2023, the opposite will occur: Seniors can look forward to an increase in the COLA because of the Part B premium. The standard monthly Part B premium will drop by $5.20, to $164.90. (The annual Part B deductible will also decline, by $7, to $226.) A lower premium is rare; the last time it dropped was in 2012. The decline is the result of the unusual circumstances surrounding Aduhelm, the controversial and very expensive drug for treating Alzheimer’s disease. The Food and Drug Administration approved Aduhelm in June 2021 despite objections from the agency’s own scientific advisory panel.
The drug was initially to cost $56,000 per patient annually — a figure that the drug’s maker, Biogen, later reduced to $28,800.
Since Aduhelm is administered in outpatient settings, the cost would be borne by Part B, not Part D, the prescription drug plan. Medicare officials anticipated Aduhelm costs when they increased the standard Medicare Part B premium for 2022 by 14.5 percent, to $170.10 per month. Medicare ultimately decided to sharply limit coverage of Aduhelm but let the large Part B increase stand, citing administrative hurdles to giving enrollees a midyear rebate.
“Medicare is reducing premiums for 2023 mainly to account for lower than expected spending on Aduhelm,” said Tricia Neuman, executive director of the Medicare policy program at the Kaiser Family Foundation.
What happens in years where the Part B premium increase is larger than the COLA?
This can be a problem during times of low inflation. During the last decade, there were two years of zero COLAs and five other years when the adjustment was less than 2 percent.
Under federal law, the dollar amount of Part B premium increases cannot exceed the dollar amount of the COLA — a “hold harmless” feature that ensures net Social Security benefits do not fall. The math affects people differently, depending on their Social Security benefit amount. In years of low COLAs or high Part B increases, people with lower benefit amounts have seen their benefit payments remain flat.
Most seniors’ prescription drugs are covered through Medicare Part D, and that program has not had a cap on the amounts that beneficiaries must pay out of pocket after deductibles are met. That can be a hardship for older people with very high drug costs. In 2020, 1.4 million Part D enrollees spent $2,000 or more out of pocket on drugs, according to the Kaiser Family Foundation.
The climate and health care bill that President Biden signed into law in August aims to start curbing those costs with a series of changes that will start phasing in next year.
In 2023, the Inflation Reduction Act curbs the soaring cost of insulin with a $35 monthly cap for Medicare enrollees. (A cap for privately insured people was stripped out of the final bill at the insistence of Republican lawmakers.) Also starting next year, drug makers will pay penalties for any price increase on a drug that exceeds the rate of general inflation.
The legislation takes a two-stage approach to capping total out-of-pocket costs. In 2024, Medicare’s requirement that enrollees pay 5 percent coinsurance above the Part D “catastrophic threshold” will be eliminated. That will provide important relief to retirees who now pay 5 percent of the cost of very expensive drugs for conditions such as cancer, diabetes, rheumatoid arthritis and atrial fibrillation. And starting in 2025, a $2,000 total out-of-pocket cap takes effect.
The legislation empowers Medicare to start negotiating with drugmakers in 2026 on prices for 10 of the most expensive drugs covered under Part D. In subsequent years, the list will expand to 20 drugs covered under Part D and Part B.
