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After that, up to 85% of their benefits may be taxed. But up to 50% of a person’s benefits may be taxed at incomes of $25,000 to $34,000. That percentage will likely continue to increase as the taxable thresholds are not adjusted for inflation.įor example, if an individual filer’s income, including benefits, is below US$25,000, none of that is taxed. Only 8% of benefits were subject to taxation in 1984, but that’s climbed to almost 50% in recent years. Thus, the 2023 increase in benefits primarily offsets what was lost over the previous year.Ī growing portion of Social Security benefits are taxed in the same way as ordinary income, except at different threshold with various caps and percentages. For example, 2022 Social Security benefits increased by 5.9% from the previous year, even though inflation throughout this year has been significantly higher – which means the higher benefits weren’t covering the higher cost of living. While helpful, these inflation adjustments are backward-looking and imperfect.

This is based on a version of the consumer price index meant to estimate price changes for working people and has been rising slightly faster than the overall pace of inflation.

Since then, benefits have climbed automatically by the average increase in consumer prices during the third quarter of a given year from the same period 12 months earlier. Not to mention that with the baby boomers – those born from 1946 to 1964 – entering the labor force it was already clear that Social Security would face long-term funding issues in the future, and so putting the program on autopilot reduced the political risk faced by politicians. Under this system, an increase in benefits could be too small or too large, or could fail to happen at all if one party blocked the change entirely. But this was an inefficient system, as politics would often be injected into a simple economic decision. How are Social Security benefits adjusted for inflation?Īutomatic adjustments to Social Security benefits began in 1975 after President Richard Nixon signed the 1972 Social Security amendments into law.īefore 1975, Congress had to act each year to increase benefits to offset the effects of inflation. Core inflation is a measure that’s closely watched by the Federal Reserve, as it helps show how pervasive and persistent inflation has become in the economy.Ģ. More troubling, so-called core inflation – which excludes volatile food and energy prices – gained even more in September, ticking up by 0.6%.

The monthly gain of 0.4% was double what economists surveyed by Reuters had expected. The latest data, for September, shows average consumer prices are up 8.2% from a year earlier. John Diamond, who directs the Center for Public Finance at Rice’s Baker Institute, explains the history of the Social Security cost-of-living, or COLA, increase, what other benefits are adjusted for inflation and why the government makes these changes.ġ.