We Got a Raise!

      The news this week for us seniors:  It was just announced that Social Security benefits for next year will increase by 8.7%. That comes after a 5.9% increase for 2022. The average monthly benefit for a retired worker currently stands at $1,660. So the average retiree will get an increase of a little over $140, to about $1,800 per month.

     That's pretty good when you consider that, according to The Conference Board, a nonprofit business think tank, the average U. S. salary increased by only 4.1% in 2022, and is expected to rise 4.3% in 2023.

     That's the good news for seniors. But there's always a catch, isn't there? For one, the bump-up in benefits could affect people who receive low-income subsidies for health care, meaning reduced amounts of assistance. The increase could also lead to cutbacks in income-related benefits such as SNAP and low-income rental assistance. By one estimate, about 40% of those receiving low-income benefits will see some reduction in at least one assistance program. 

     Others could see their incomes increase to the point where they have to pay income tax on their benefits. It gets complicated, but the basics are:  as an individual, if your income is above $25,000 a year -- or $32,000 for a joint return -- you are liable for federal tax on a portion of your income. If your individual income is above $34,000, or joint income above $44,000, then 85% of your benefits are subject to tax.

     Unfortunately, these thresholds were established in 1986 and never adjusted for inflation. So in 1986 some 15% of beneficiaries paid income tax on their benefits; today 56% of Social Security recipients owe taxes on their benefits.

     Then there are Medicare premiums. Those increases have not been announced yet. They went up by 14.5% for this year. There's some talk they will not go up at all for next year, or could even go down, due to the large increase last year. But who knows at this point. 

     In addition, a jump in Social Security benefits could push your income up to the point where you'll have to pay a surcharge for Parts B and D of Medicare. Currently, the level that triggers the extra charge is $97,000 for an individual, and $194,000 for joint filers.

     Still and all, we're glad to see an increase in benefits, even if our "take-home pay" is less than our gross pay. But there is one other bugaboo. The 8.7% increase to current and future retirees means more money is flowing out of the system. That in turn could mean Social Security reserves will run out of money sooner than 2034, which is the current estimate.

     Currently, about 90% of benefits are paid out of payroll taxes. The rest comes from the infamous "lockbox" of the Social Security trust fund. If the economy goes into recession, as many are expecting, higher unemployment will mean a drop in funding from payroll taxes.

     But no one knows for sure. Even if some jobs are lost, if wages rise next year, that will mean more payroll tax is collected. And also, the maximum amount of earnings subject to payroll tax will increase next year from $147,000 to $160,200 -- another source of more funds for Social Security.

     Social Security is a great program, keeping many seniors out of poverty, and bolstering the incomes of many others, allowing us retirees to hang onto our middle class standard of living. But there are no guarantees. For every push there's a pull. We manage as best we can.