Many retirees will pocket more money each month starting in 2023 due to the highest increase in Social Security COLA in 40 years paired with the first reduction in Medicare Part B premiums since 2012.

However, that bump in earnings can mean certain high-earning Medicare beneficiaries may pay hundreds of dollars more in Medicare premiums — and low-income Medicare beneficiaries may lose financial assistance for Medicare payments.

Social Security’s 8.7% cost-of-living adjustment is the largest since 1981 — and the fourth largest of all time, according to the Social Security Administration.

“A COLA this high is almost unprecedented,” the Senior Citizens League, a non-profit focused on issues affecting older Americans said in a statement. “This may be the first and the last time that today’s beneficiaries receive a COLA this high.”

At the same time, Social Security COLAs are failing to keep up with rising Medicare premium costs in the long term. And that will eat into how much you have left to pay for basic needs.

“While this [Social Security COLA] increase is historic and needed, it is also inadequate for the millions of older Americans who face skyrocketing housing and health care costs across the country,” Ramsey Alwin, President and CEO of the National Council on Aging, said in a statement.

This race between rising Medicare costs and Social Security’s failing efforts to keep up is highlighted by the finding that people 65 and older made up the only demographic for which poverty increased in 2021, according to the National Council on Aging.

A Rising COLA Complicates Your Medicare Costs

The COLA Can Cost You

Rising Social Security COLAs can impact your Medicare costs. People who rely on low-income assistance to pay for Medicare could lose that help if the Social Security COLA pushes them above the assistance threshold.

A survey by the Senior Citizens League found that 38% of people receiving low-income assistance had their benefits reduced by the 5.9% COLA in 2022.

On the other hand, Medicare Part B premiums increase as your annual income hits certain thresholds, starting at $97,000 for individual income or $194,000 for joint income. Any increase in income — including the COLA — that pushes you over one of those thresholds increases your monthly premium. This may also cause you to pay more for Medicare Part D prescription drug coverage.

Simply crossing that income threshold by a dollar can mean an extra $800 to $1,000 in premiums.

COLAs Can’t Keep Up With Medicare Costs

COLAs and Medicare Costs

While COLAs bump some people into a higher premium bracket, it doesn’t do enough to keep up with rising Medicare costs for all beneficiaries.

Social Security and Medicare each make annual adjustments — but they use very different metrics to reach their numbers. Social Security uses the Consumer Price Index-Urban Wage Earners and Clerical Workers — or CPI-W — to calculate annual COLAs. Medicare adjusts Part B premiums on the growth of expenses for the Medicare program.

The difference between these two measures means Medicare Part B premiums have been rising much faster than Social Security COLAs. Between 2000 and 2018, Social Security COLAs rose a cumulative 50% — but Medicare Part B premiums shot up 195% over the same period, according to the Congressional Research Service.

And a 2022 analysis from the Kaiser Family Foundation found that the current wave of overall inflation hasn’t moved through the health sector yet.

Health care prices tend to be set in advance by health care administrators, health insurance companies or government programs like Medicare and Medicaid. That means, delayed raises to health care workers or costs of medical services could be a ticking time bomb of added expenses in the months ahead.

The true picture of health care inflation probably won’t reveal itself until we have a clear picture of how price negotiations between insurers and providers play out.

Is the COLA Too Little, Too Late?

Too Little, Too Late

Advocates for older Americans warn that while the COLA is welcome, it fails to address many of the true costs that the aging population faces.

“We need a better measure of the true cost of living for older adults. Using the Consumer Price Index … for the COLA increase is inadequate,” NCOA’s Alwin said.

The CPI-W is based on fluctuations in the cost of urban wage earners’ and clerical workers’ basic needs. But that average can vary from the needs of retirees and people on Medicare facing steep out-of-pocket medical costs as they age.

Alwin recommends shifting Social Security COLAs to the Elder Index, an income measure based on basic economic needs of retirees and other older adults created by the Gerontology Institute at the University of Massachusetts Boston.

There’s also the fact that any Social Security COLA reflects the inflation that happened in the preceding year. That means, Social Security beneficiaries may have to deal with higher costs for a full year before the COLA kicks in.

This is illustrated in the table below, showing the highest COLA increases. You can see how increases rippled through the late 1970s and early 1980s, which was the last period of significantly high inflation. The 2023 increase reflects inflation in 2022.

The 5 Largest Social Security COLAs Since 1975

14.3% 1980
11.2% 1981
9.9% 1979/td>
8.7% 2023
8.0% 1975

Source: Social Security Administration

In addition, the COLA may result in higher taxes for some Social Security beneficiaries who continue to work. Recipients whose combined wages and Social Security income is below $25,000 for single filers — or $32,000 for joint filers — don’t have to pay income taxes. If the 8.7% COLA bumps you over that threshold, then you’ll pay higher taxes.