2023 Social Security COLA Is Huge: Traditional Retirees Rejoice!

I don't know if you've heard, but the 2023 Social Security COLA (Cost Of Living Adjustment) is a whopping 8.7%! This increase is both huge and head-scratching.

The 2023 Social Security COLA is huge because inflation peaked in June 2022 at 8.9%. The latest January 2023 CPI came in at 6.4%. Therefore, traditional retirees will be earning at least a real 2.3% more from Social Security in 2023.

It's great to be a traditional retiree, as opposed to an early retiree, because traditional retirees get to earn a higher risk-free wage than the majority of American workers!

Consumer Price Index historical chart

Why The Large Social Security COLA Increase Is Strange

The large 2023 Social Security COLA increase is also perplexing given our nation's pension fund is underfunded by about 22%. If politicians wanted to make Social Security whole, an easy way to help would be to pay a much lower COLA for 2023.

I know there's a lagging formula that calculates Social Security COLA each year. However, I suspect nobody would have batted an eye had the Social Security Administration said the 2023 COLA would be 6.4% instead of 8.7%. 6.4% would match the January 2023 CPI.

Heck, the SSA could have even come out and said the 2023 COLA was 5% and the majority of recipients and hopeful recipients would probably have been pleased. The argument for a 5% COLA would be that inflation is coming down and the headline CPI could average 5% in 2023.

After all, many of us are thrilled to buy risk-free Treasury bonds yielding 5%. Therefore, I'm sure most Social Security recipients would be equally thrilled to earn 5% more as well.

An Increased Social Security COLA Is Inconsistent With The Data

A final reason why the 2023 Social Security COLA increase seems odd is that the government announced in late October 2022 that the November 2022 – April 2023 I Bond interest rate would be 6.89%.

In response, I published a post on November 2, 2022, called, “The Most Bullish Economic Indicator I Know – A Lower I Bond Rate” which lead me to buy more of the S&P 500.

I'm sure there is a valid explanation for why the government lowered the I Bond rate from 9.62% to 6.89%, yet raised the Social Security COLA to 8.9% for 2023 from 5.9% in 2022. But I don't see it!

If the government is looking at the same inflation data, there should at least be consistency in the direction of the percent adjustments based on the respective formulas. Alas, it's as if the government departments are not talking to each other or looking at different data.

Social Security Is The Ultimate Safe Pension

When I was younger, I used to look down on Social Security. I didn't think Social Security would be there for my generation (Gen X). Therefore, I aggressively saved and invested.

Instead of relying on the government to fund my retirement, I relied on myself. I even declared the new three-legged retirement stool called, You, You, and You.

The idea is to count on only your hard work, your retirement savings, and your side hustles for and during retirement. If Social Security is there for us when we're old, then great. If not, that's OK too because we never counted on it in the first place.

Now that I'm in my mid-forties, I have a more positive view on Social Security. First of all, my 70+-year-old parents are receiving Social Security. For this, I'm thankful as it helps alleviate my financial worry for them.

But most of all, I've witnessed for the past 20+ years how politicians are unwilling to pass legislation to raise the Social Security retirement age or cut benefits to make the system whole. Altering Social Security is political suicide.

To now see the 2023 Social Security COLA increase to 8.9% when inflation is declining is the final proof I need that we'll all get our full Social Security benefits! There’s no need to combat inflation in retirement thanks to the stubborn government!

Politicians want nothing more than to stay in power. Hence, they will do everything they can to ensure all working Americans get as much money in retirement as possible.

Stress Relief For Workers Everywhere

The biggest takeaway from the 2023 Social Security COLA increase is that all working Americans don't have to work as hard or save and invest as much anymore. This means less stress and a better life.

Not once have I ever included my potential Social Security benefits when calculating my retirement cash flow. Instead, I've only used what I've earned, saved, and invested in my retirement calculator variables.

Here's a basic retirement calculation example excluding Social Security.

  • Desired annual pre-tax spending amount in retirement: $100,000
  • Estimated withdrawal rate or rate of return: 4%
  • Capital needed: $2,500,000

Now that I have more conviction Social Security will be there for all of us in retirement, here is a new retirement calculation example.

  • Desired annual pre-tax spending amount in retirement: $100,000
  • Estimated Social Security benefits in retirement: $30,000
  • Gross income amount needed excluding Social Security: $70,000 ($100,000 – $30,000)
  • Estimated withdrawal rate or rate of return: 4%
  • Capital needed: $1,750,000

Thanks to Social Security, this couple needs $750,000 LESS in capital to fund their retirement. If the couple saves $50,000 a year on average, including returns, the couple can reach that level of funding up to 15 fewer years!

Of course, if they retire before being eligible to collect Social Security, they'll need to come up with alternative income or taxable passive income as a bridge.

Given time is way more valuable than money, Social Security must be defended at all costs. Raise the COLA faster than inflation every year if need be. The government can kick the can down the road after we're dead.

The Average And Maximum Social Security Benefits After COLA

According to the latest SSA factsheet, the average Social Security benefit after the 8.7% COLA is $1,827 in 2023. That's $21,924 a year in Social Security benefits.

If you've been earning the maximum income to pay the FICA tax limit for 35 years, you'll be able to earn the maximum Social Security benefit.

The maximum benefit for a worker who claims Social Security at full retirement age (FRA) in 2023 is $3,627 a month, up from $3,345 in 2022. FRA is 66 years and 4 months for people born in 1956 and 66 and 6 months for those born in 1957; people born from Sept. 2, 1956, through July 1, 1957, will reach it in 2023.

$3,627 a month equals a healthy $43,524 a year in Social Security benefits. The vast majority of individuals can live off this amount.

Given I've been working since 1999, I plan to generate at least 10 more years of active income at the FICA tax income limit to earn the maximum Social Security benefit when I reach traditional retirement age.

Higher Social Security benefits is another positive of being a fake retiree. Find something you enjoy doing after your career is over that also pays you money. If you do, you'll feel an incredible sense of winning.

The value of a maximum Social Security benefit of $43,524 a year is as follows:

  • $1,450,800 at a 3% withdrawal rate until death
  • $1,088,100 at a 4% withdrawal rate until death
  • $870,480 at a 5% withdrawal rate until death

When we die, the value of our Social Security benefits is reduced to zero, unless it generates survivor benefits. The calculation is similar to how we calculate the value of a company pension. Although with a company pension, the risk is higher the monies won't be paid out in full.

Thanks to COLA, we should expect Social Security benefits to continue increasing every year until we all die. In traditional retirement, the vast majority of Financial Samurai readers should be millionaires as well.

FICA Tax Rate Revisited

FICA stands for Federal Insurance Contributions Act. It consists of a 6.2% Social Security tax and a 1.45% Medicare tax that automatically gets deducted from your paycheck.

The Social Security tax rate is 12.4% – 6.2% is withheld from the employer and 6.2% is withheld from the employee. The Medicare tax rate is 2.9% – 1.45% withheld from the employer and 1.45% withheld from the employee.

Therefore, for regular employees, you will pay 7.65% of your income up to the maximum limit of $160,200 for 2023.

If you are self-employed, you must pay the full 15.3%, but you can take a deduction for half this amount. Paying the full 15.3% FICA tax is one of the reasons why many small business owners elect to form S-Corps.

Stay on top of the latest tax brackets each year so you can optimize your time and money.

Social Security COLA Takes Care Of The Wealthiest Generation

Take a look at the below chart by the Federal Reserve that highlights the percentage of total net worth by generation. The Baby Boomers, those born between 1946 – 1964, are the wealthiest generation.

Millennials, those born between 1981 – 1996, barely have any wealth. Yet, the government has decided to give Boomers an 8.7% COLA increase. Gotta love it as a Boomer!

Wealth by generation to show why Social Security COLA shouldn't be raised for Boomers

Taking From The Poor To Give To The Rich

Below is another wealth-by-generation chart from the Federal Reserve which is constructed slightly differently.

Sure, the Millennial cohort is obviously younger than the other two cohorts and should be less wealthy. But there are more Millennials than Boomers now. If the government really wanted to properly redistribute wealth, it would focus more on helping the poorer generations.

Giving an 8.7% COLA increase for 2023 to Boomers is like elite private universities giving full-ride scholarships to Barack Obama's and Donald Trump's kids. It would be better for universities to give scholarships to poorer students who are struggling to get out of the poverty cycle.

Given the government is run by the rich elites, taking from the poor to give to the richest generation shouldn't be a surprise. It's one of the reason why growing our population is so important.

U.S. household wealth by age of generation's median cohort and a discussion on Social Security for the wealthy

OK, OK, I'm being a little dramatic in my socioeconomic analysis. So let me share one final chart that highlights how Millennials are just as wealthy as Boomers at the same ages.

Therefore, we shouldn't have to worry too much about “poor Millennials.” In addition, the Millennials will be inheriting trillions from the Boomers. We just have to go after Gen Z!

Millennials, Boomers, Gen X wealth at the same age

Better To Not Rely On Social Security For Retirement

Despite feeling more convinced full Social Security payments will be there for all of us in traditional retirement, I still recommend caution. The worst thing that can happen is you don't save anything for retirement and the government decides to cancel Social Security altogether.

Therefore, save and invest as if Social Security won't be there for you. Focus on building and doing the following:

  1. Tax-advantaged retirement accounts to be there for you past age 59.5
  2. Taxable investment accounts to generate passive income immediately
  3. Side hustles to generate extra income while young and supplemental income in retirement

Personally, I'm going to do my best to forget that I could receive maximum Social Security benefits in 21 years. It's just hard since I write about personal finance every week!

Population by age / generation in America

Americans Are Overly Reliant On Social Security

Check out the percentages of the population aged 65 or older for whom Social Security benefits accounted for at least 50 percent and at least 90 percent of family income. The data is from the Census Bureau.

About a quarter of seniors 65 and older rely on Social Security benefits for 90 percent or more of their income. 55.2 percent of women and 47.5 percent of men rely on Social Security benefits for 50 percent or more of their income.

Reliance on social security by age, sex, race

In contrast, I would like all Financial Samurai readers and listeners to plan to have Social Security accounts account for 10 to 20 percent of their retirement income or less.

The more financially self-reliant we can be, the more the government will be able to do to help those truly in need.

Traditional Retirement Looks Better And Better

In conclusion, I say traditional retirement is looking more attractive than it's ever been thanks to added Social Security benefits. Early retirement is becoming obsolete due to more work flexibility and more ways to make extra income.

The key is to not settle for a job we don't like. We must force ourselves to keep searching for work that provides meaning. If we don't, we will look back with regret having wasted some of the healthiest years of our lives.

For 2024, the Social Security COLA will come down because inflation peaked in mid-2022 and has declined to below 3.5% in 2023. Hope you lock in those Treasury bonds and enjoy the higher interest rates while they last!

Questions And Recommendations

Readers, what do you think about the government's decision to raise COLA by a record 8.7% for 2023? Are you excited that once you're rich, you too, will also get a large COLA increase? Any traditional retirees collecting Social Security and feeling great as a result?

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40 thoughts on “2023 Social Security COLA Is Huge: Traditional Retirees Rejoice!”

  1. My wife and I are senior citizens relying on Social Security. All the benefit increase last year went into Medicare and part D surcharges so this year we are getting less then last. Next year will probably be the same (we are in the 35% bracket) as those Medicare premiums tend go up faster than COLA.

  2. The COLA increase did absolutely nothing because it wasn’t an increase at all! Sure we got an extra what $144 Only to be charged $145 in fees on other matters like SNAP lowered Health Care fee increase etc etc. Sure thanks for the increase but I’m now receiving $0.78 cents less than I did prior!

    1. Dang, curses to the government then.

      I talked to one man who has a government pension and he said he got an 8.7% increase and he notices the several hundred dollars a month difference. He’s usually not easily pleased, so I was surprised by his positive reaction.

      1. I don’t understand. You write many retires need SS benefits because they don’t have enough money. The reason I don’t understand this is because I see them driving $50,000 cars. They take cruises, and they help their children buy their first houses.
        Where are these poor retirees?

    2. Most folks didn’t a healthcare decrease, in fact medicare decreased on avg slightly. My folks got a big jump

    3. “ 23 CPI came in at 6.4%. Therefore, traditional retirees will be earning at least a real 2.3% more from Social Security in 2023.” Lolololool

      Real inflation is much higher than the government’s manipulated numbers . It will be meaningless if you are a millionaire, otherwise REAL inflation & dollar devaluation paints a whole different picture….

  3. “I’m sure there is a valid explanation for why the government lowered the I Bond rate from 9.62% to 6.89%, yet raised the Social Security COLA to 8.9% for 2023 from 5.9% in 2022.

    The cynic in me says the 22% and 24% tax brackets may increase 2.3% (the most likely tax brackets of Social Security pensioners)

      1. The maximum taxable SS wage cap increases every year. That’s a built in tax increase on high middle earners.

  4. Retired Agent

    I am a proud Boomer age 70 soon to be 71. Because I was the higher earner in our household I waited until age 70 to draw on my social security earnings. We started drawing on my wife’s Social Security benefits when she was 63 ( 2yrs age difference) and I took a spousal benefit on her Social Security. My wife now draws a spousal benefit from my Social Security to increase her benefits. I was lucky enough to be a max earner for most of my working career. I owned a small business that did very well. Due to our earnings we pay additional Part B Medicare premiums and extra Part D premiums. Social Security taxes and earnings need to be changed to extend Social Security. However, people over age 55 need to be protected from many changes to allow them to properly plan for retirement. Remember someone like me votes in every election and makes political contributions.

    1. Congrats from benefitting the maximum from SS! Does it feel like a “gift” or a “bonus”? Or do you feel it’s what you rightly deserved since you paid into it for 35+ years?

      I’m trying to guess how I will feel once I receive it.

      1. Retired Agent

        I played by the rules so Social Security Benefits seem deserved. We have always been “Savers” The house was paid off at age fifty-one. Not fans of debt. Using money for our grandchildren 529’s etc. My parents really helped all their children with school tuition and a start in life. We are doing the same our grandchildren.

        1. Good stuff. Must feel great to be debt free at 51 and help the kids and grandkids get a head start.

          It’s very satisfying to pay down mortgage debt over time. I got a goal to pay down another rental by 2026 before the rate resets. Feels great making progress.

        1. I just turned 62 and I am running the numbers trying to decide the best time to take SS. However, although one does receive more when they turn 70 they also lose any investment gains that might have been made by taking SS earlier. Of course, this does not apply to those who actually live off of SS but this individual is clearly not in that category.
          I’m delaying for right now, but mainly because of the uncertainty in the economy and the markets.

  5. Every time I mention the SS increase to my mother-in-law (who receives SS) I get the “yeah-but” answer. “Yeah-but, they take out more for Medicare and my medical insurance keeps going up.” “Yeah-but the cost of my medications cost more,” etc.

    1. That is true most years, but not this year. Medicare cost premiums went down slightly on average, so it was a double win for retirees

  6. You know what would be incredibly helpful? A calculation of what total annual revenue from FICA taxes would be needed to fully fund Social Security at current benefit levels for the foreseeable future, and THEN to figure out what the FICA tax percentage would need to be to generate that amount of tax revenue if the FICA tax was applied to every dollar of earned income (no wage cap).

    The current Social Security tax rate is 6.2% and it is projected to produce revenues that are short by 22%. Applying that 6.2% to every dollar of earned income (not just the first $160k) would surely produce more than enough revenue to cover that 22% shortfall. So, the overall 6.2% rate can almost certainly be cut while still producing enough revenue to ensure full benefits are paid…if that lower rate is applied to every dollar of income.

    So, what is the right rate? Could we lower the SS tax to 4.2% and raise enough revenue if applied to every dollar of income? Would the American public support a plan that both saves Social Security at current levels for future generations AND gives them (the vast majority of them) a tax cut?

    This has been missing from the debate about Social Security for generations. It has long been my contention that the simplest fix to the funding issue (and the easiest political sell) is to eliminate the wage cap, which would permit a REDUCTION in the needed FICA tax rate. That is, a tax cut for the majority of workers that actually secures (maybe even increases) Social Security benefits for all.

    Who would be hurt? Wage earners over a certain income level (a level much higher than the current wage cap). While this group wields disproportionate political power, it is unlikely to be strong enough to stop a commonsense reform that helps the middle class today (with a tax cut) and tomorrow (with secure Social Security funding).

    I am constantly astonished that this solution and this information is not made readily available by advocates for saving Social Security….

    1. I think you and Mr Samurai should do some research on the bend points on the SS pay out charts you will find that people who are at the wage cap and the wealthy of the richest generation are already are paying a disproportionate amount money and receive limited or no benefit for their higher contributions.
      Being self employed, had I saved that money conservatively I could collect more than twice what the government claims they will pay me when I collect. Am I personally grateful for SS not really but I am pleased that it provides benefits to so many people who need it. It would be nice if the media/government would acknowledge this instead of demonizing high wage earners. It is silly when a politician stands up and says this administration has given you X. Not really, it comes from your fellow citizen.
      Mr Samurai I believe you were in the front of the line with historical low interest rates (to fund your real estate interest) while richest generation was getting less than 2% on 10 year T bill for retirement . This was an inheritance from the richest generation before anyone died.

      1. I just find it absurd that someone making under $200k is paying literally the same SS tax (amount, not percentage) as someone like Lebron James.

        I understand that SS benefits do not go up proportionally to account for multimillion dollar/year earners. It shouldn’t. This isn’t a retirement plan; it’s an insurance plan designed to (1) supplement retirement savings, and (2) help lift poor seniors out of poverty.

        Sustaining the program should be a non-negotiable goal, and getting rid of the wage cap seems like the best way to do so because it requires more only from those with the greatest ability to pay…as opposed to raising the retirement age or cutting benefits.

        1. Disagree. It’s literally for every single retiree, it’s a retirement plan. Medicare you can kind of argue is an insurance plan, and that one also disproportionately is covered by the wealthy (no income cap on Medicare + 0.9% incremental wages over 200k). For every dollar a lower income person puts in, they get the equiv of ~$6 in the end vs my $1 to $1.

          The SS system was designed to have 30-40 payers for each retiree and only last a few years. Now its 3:1 and it last decades. It also causes significant moral hazard. The age of receiving them, like all public pensions, needs to be increased, slowly, over time.

  7. Odd – just a few changes (remove the earnings cap, for instance) could help bring SS into “solvency”. Perhaps some judicious means testing of the the program as well. After all, there is no income max subject to the Medicare portion of SS taxes. All of this ignores the real deficits faced by the Fed. Gov’t – which does not use GAAP accounting (but for a few accounts). $50 Trillion?

    Keep up the good work Samurai (!)

    1. I posted a longer version of this comment, but I think removing the earnings cap is part 1 of a two part process. Part 2 is lowering the tax rate.

      Surely we do not require the full 6.2% applied to every dollar of earnings over $160k to close a 22% funding gap. I’ve been looking for an assessment of just how low the tax rate can be (while applying it to every dollar of earned income) to produce the needed revenue to fully fund Social Security.

      That this information has not been made readily available is a massive failure by those advocating saving Social Security….

    2. Removing the earnings cap would be the biggest tax increase on the upper middle class and lower upper class since the 1940s. Means testing is also a horrible, horrible idea. All you are doing is moral hazard – encourage people to be lazy, not save, etc. SS was designed to be just a few years – now its decades. Increase the age slowly – 1 month a year – for the next 40 years – and you also fix the problem, and more permanently than your way. People with disabilities can already get theirs early so thats not a reason.

  8. Come on Sam. Instead of making it sound like it’s subjective how much they increase COLA (just like you made it sound like the I-bond calc was subjective, which wasn’t either), just point out the calculation which is formulaic, as spelled out in the Social Security Act. It is NOT a “decision” and it’s not “perplexing”, it is a formulaic requirement, unless Congress passes a new act which changes the calculation and the President signs it…political suicide though.


    A COLA effective for December of the current year is equal to the percentage increase (if any) in the CPI-W from the average for the third quarter of the current year to the average for the third quarter of the last year in which a COLA became effective. If there is an increase, it must be rounded to the nearest tenth of one percent. If there is no increase, or if the rounded increase is zero, there is no COLA for the year.

    COLA Computation
    The last year in which a COLA became effective was 2021. Therefore the law requires that we use the average CPI-W for the third quarter of 2021 as the base from which we measure the increase (if any) in the average CPI-W. The base average is 268.421, as shown in the table below.

    Also shown in the table below, the average CPI-W for the third quarter of 2022 is 291.901. Because this average exceeds 268.421 by 8.7 percent, the COLA effective for December 2022 is 8.7 percent. The COLA calculation, with the result rounded to the nearest one-tenth of one percent, is:

    (291.901 – 268.421) / 268.421 x 100 = 8.7 percent.

    CPI-W for—
    2021 2022
    July 267.789 292.219
    August 268.387 291.629
    September 269.086 291.854
    Third quarter total 805.262 875.702
    Average (rounded) 268.421 291.901

    1. This is great feedback. Thank you for running the numbers.

      My points are:

      * Nothing is set in stone. We can change SS benefits and requirements if we really want. But it’s political suicide to do so, so we will never. Question everything.

      * Yes, the new rates are based on a lagging formula. However, the differential of 2%+ up for SS COLA and 2% down for I Bond rates is perplexing. A gut check says the interest rate direction should at least be the same.

      * People afraid of inflation should rejoice more. We will be taken care of in retirement due to these formulas that calculate SS COLA.

      The 2023 SS COLA increase is a huge positive. It’s so positive that it has provided me peace of mind to do even less work this year. The best income truly is no more than ~$180,000 per person.

      1. This all seems very disingenuous. The COLA for 2021 was 5.9% while the Ibond rate was 7.12% from Nov 21-April 22 and 9.62% from May 22-Oct 22. As others have mentioned, the COLA adjustment was just a lagging indicator/makes up for the very real decline in real income SSI recipients felt in 2022.

        The retired/pensioners are most at risk from rises in inflation. If anything, SSI recipients should be 1st in line for inflation adjustments vs the current system where any adjustments are delayed until well after inflation has set in.

  9. The COLA is to make up for the previous year’s inflation. Of course, it looks great for the current year, but one must remember that in 2022 one received less money than the rate of inflation. This year one comes out ahead, last year, one fell behind. Unless the government was to make changes retroactively we are stuck with a lagging system.
    Imagine if inflation drops to zero in a given year, the COLA for the following year would be zero. Yet if inflation rose again the following year, the recipients would not have gotten any raise for that year.

    1. True, but isn’t it interesting how I Bond rates fell by 2% through the first part of the year vs a 2%+ rise for SS COLA? You’d think they’d at least directionally be the same.

      Let’s see what 2024 SS COLA will be.

      Are you collecting now? If so, are you loving it like a juicy double cheeseburger?!

      1. I became eligible in December but I have not decided to collect just yet. Originally I had intended to collect and simply invest the money but with the uncertainty in the markets and interest rates, I’m holding off.

    2. The 2022 Social Security COLA was 5.9%. 5.9% isn’t too far away from the average 2022 inflation of ~7%.

      However, there was only one month in 2022 where inflation was above 8.7%, and that was in June at 9.1%. So to get 8.7% 2023 COLA seems aggressive.

      Then again, the 2021 COLA was only 1.3%. So I guess things are somewhat evening themselves out!

  10. Roy David Farhi

    The fact you know you could live off SS @FRA and basically a 16 hour per week job in retirement is notably satisfying. Medicare and Social Security are a great set of twins to adopt.

  11. Wow 8.7% is a huge jump! I’m surprised to hear they raised it by that much. I’m not counting on collecting Social Security by the time I get into my 70s, but it’ll be a nice bonus if I can.

    It’s definitely helped my parents a lot to be able to collect benefits so I’m glad it hasn’t run out for them and others yet.

  12. Yes, my wife is on SSDI, so I see this increase. And on my own paycheck, I keep saying how the taxable income for social security taxes goes up. I should calculate year to year how much we’re gaining / losing (wife’s increase minus my payment is extra taxes)!

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