For the longest time, I've wondered whether Social Security is a dependable source of income for traditional retirees. As someone still over 22 years away from being able to collect, it's hard to believe in the system given it is already underfunded by ~22%.
Therefore, when the Social Security Administration announced the cost of living adjustment (COLA) for 2023, I was shocked! Due to rising inflation, there will be a COLA of a whopping 8.7% in 2023, up from a COLA increase of 5.9% in 2022. The increase will translate to an addition of $92 to retirees’ average monthly benefit next year.
Earning the average Social Security benefit of $1,827 a month or $21,924 a year in 2023 until death is not bad. Further, the maximum Social Security benefit increases from $3,345 in 2022 to $4,555 in 2023.
The average person would need about $548,100 in capital returning 4% to generate the average Social Security benefit of $21,924 a year. In other words, we can make the assumption that the average American retiree is a half-millionaire.
As a result, I have no doubt the majority of Financial Samurai readers will be millionaires in retirement as well. We are not only saving aggressively ourselves, we also may very well have health Social Security checks as well!
2023 Social Security Cost Of Living Adjustment
For 2023, Social Security benefits will increase by another impressive 8.7% because of a rise in cost of living. The 8.7% Social Security cost of living adjustment is the highest in 40 years.
For those collecting Social Security, congrats! However, for the majority who aren't collecting Social Security yet, this adjustment will further boost inflation.
The average retiree benefit will go up by $146 per month, to $1,827 in 2023 from $1,681 in 2022, according to the Social Security Administration. The average disability benefit will increase by $119 per month, to $1,483 in 2023 from $1,364 in 2022.
What's more, standard Medicare Part B premiums will go down by about 3% next year to $164.90, a $5.20 decrease from 2022. Medicare Part B covers outpatient medical care including doctors' visits.
Finally, the maximum Social Security benefit in 2023 is an impressive $4,555 a month.
Largest Social Security COLA Since 1982
All this time, I had thought Social Security would not pay out its fully promised amount. For it to now pay such a huge cost-of-living adjustment is baffling since larger payments reduce the plan's financial health.
The Social Security Board of Trustees recently said the trust fund that pays benefits is projected to become depleted by 2034, a year earlier than estimated in 2020. At that time, Social Security income would be sufficient to pay about 78% of scheduled benefits.
The 2022 5.9% Social Security cost-of-living adjustment and 2023 8.7% COLA adjustment will be the largest since 1982, according to Social Security Administration data. The adjustment is based on the difference between the CPI-W index’s average for the third quarter of the current year compared with the same period in the previous year.
For those of you who still have to pay a Social Security tax (FICA tax), the maximum amount of earning subject to the tax will increase to $147,000 in 2022 from $142,800 in 2021. Curiously, that equates to only a 2.94% increase versus the 5.9% COLA increase.
For 2023, the FICA tax rate for employers is 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2022). For 2023, an employee will pay: 6.2% Social Security tax on the first $160,200 of wages (6.2% of $160,200 makes the maximum tax $9,932.40), plus. Ouch. There is never a free lunch.
If the government wanted to improve the financial health of Social Security, it would at least raise the maximum taxable income limit by 5.9% and 8.7% as well. Although not a popular move, raising the income tax limit by 10% – 20% to $157,080 – $171,360, while capping maximum benefits, probably would have passed critical eyes.
FICA Tax Rate Revisited
FICA stands for Federal Insurance Contributions Act. It consists of a Social Security tax and a 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 ($147,000) in FICA taxes. Again, for 2023, the maximum income limit goes to $160,200. Let's just use the 2022 as an example.
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.
FICA Tax Example Using An S-Corp To Save
Let's say you have an S-Corp and have gross profits of $147,000. To simplify, your only operating expense is income. If you pay yourself a “reasonable wage” of $47,000 and $100,000 in distributions, you get to save $15,300 in FICA tax ($100K X 15.3%).
Unfortunately or fortunately, there is no maximum income limit on Medicare tax. You'll just have to keep on paying the 1.45% Medicare tax for as high as your income will go.
Further, there is an additional Medicare tax of 0.9% for high-income taxpayers with earned income of more than $200,000 ($250,000 for married couples filing jointly).
Could Retirees Really Do Fine With Social Security?
We know that consumer prices have risen quickly due to trillions of dollars of economic stimulus. Everything from food to new cars, to home prices have skyrocketed in value. However, prices finally began to moderate starting in mid-2022 and should continue heading down in 2023.
If you're a retiree who has a paid-off home, has no need for a new car, eats moderately, and doesn't spend much on clothes, inflation isn't as big of a hit. Yet, with a 8.7% Social Security benefits increase in 2023, a retiree is finally beating inflation.
Personally, I'm simply going to consume less during a supply-shock scenario. I'll get the latest hit toy for my kids next year when it's half off. Or, they'll just have to play with cardboard boxes.
After 40+ years of saving and investing, inflation has done a wonderful job at inflating your stocks, real estate, private investments, and alternative investments. Too bad bear markets hit every 7-10 years as well.
Therefore, providing an additional 5.9% COLA adjustment is icing. To then add another 8.7% Social Security cost of living adjustment for 2023 is amazing. I could totally live off $4,555 a month in Social Security benefits if I had no debt.
It is the person who is still paying FICA tax and still decades away from a traditional retirement age that probably needs more help. Not the absolute richest generation in our earth's history.
Wealth By Generation Charts
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 dominating generation.
Millennials, those born between 1981 – 1996, barely have any wealth. Yet, the government has decided to give Boomers a 5.9% COLA increase despite an already underfunded pension plan? Wow!
Below is another wealth by generation chart from the Federal Reserve, just constructed 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 a 8.7% COLA increase for 2023 to Baby Boomers is like elite private universities giving full-ride scholarships to Barack Obama's and Donald Trump's kids. Instead, wouldn't it be better for universities to give scholarships to poorer families struggling to get out of the poverty cycle? I think so.
But as we found out from the latest college rankings by Forbes, Harvard's share of Pell students is just 12% versus 25% on average for students enrolled in Forbes' top 600 colleges. In other words, the rich like to take care of their own even though they speak differently in public.
Given the government is run by the rich elites, taking from the poor to give to the richest generation is par for the course. It's called pulling the ladder up from behind you once you've gotten yours.
Don't Rely On Any Social Security For Retirement
Given the government's logic of:
- Raising COLA by 8.7%, but only raising the maximum income subject to FICA tax by 2.94%
- Helping the rich more than the poor
It's only rational for us to continue to not rely on Social Security for retirement. If the government wanted to fix Social Security, it would do the opposite of the two things above. Raising COLA by 8.7% for 2023 lowers our chances of being made whole when it's our time to collect.
Therefore, we need to rely on the new three-legged stool for retirement:
If Social Security is there for us when we're in our late 60s or 70s, fantastic. If not, it doesn't matter because we didn't rely on it to fund our needs in the first place.
The sad truth is, about a quarter of seniors 65 and older rely on Social Security benefits for 90% or more of their income, an AARP analysis of Census Bureau data found. It behooves all of us to NOT end up being in this bucket of people.
The more of us who can be financially self-reliant, the more the government can do to help those truly in need. Medical care and prescription drugs will likely continue to go up at a much faster rate of inflation.
However, if the government's logic continues unchanged, we, the self-reliant, might actually be the biggest beneficiaries of the government's decisions in our golden years. How ironic is that?
If in doubt, retire rich. Not only will you be able to take care of yourself, the government may give you more money too. The Social Security Cost of Living Adjustment will go down in 2024 given inflation peaked at 9.1% in mid-2022 and is now below 3.5%.
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?
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