Have you ever wondered how the rising cost of living impacts those who rely solely on federal benefits like Social Security Disability Insurance (SSDI)? It’s a question that’s on a lot of minds these days, especially with inflation on the upswing.
So, how does SSDI tackle this issue?
SSDI is inflation-adjusted via the Cost-of-Living Adjustment (COLA). Each year, the Social Security Administration determines if the next year’s benefit will include a COLA, ensuring the purchasing power of benefits isn’t eroded by inflation. The 2023 COLA increased the average benefit by $146.
Read below to learn more about how COLA works.
Is SSDI Inflation-Adjusted?
Social Security benefits are adjusted annually to keep up with inflation through what’s known as COLA. Each year, the Social Security Administration determines whether to include a COLA in the next year’s benefit and, if so, the size of the increase. Contribution levels to the program are also tied to the inflation rate.
However, the data used to measure inflation may not always account for certain costs, especially those that retirees often face. As a result, if the cost of living rises faster than their COLA, seniors might experience a decrease in purchasing power.
SSDI and COLA: A Brief Background
In the legal landscape of Social Security, it’s important to understand the historical context. For the first 40 years of the Social Security program, beneficiaries did not receive automatic COLAs to their benefit payments. Increases were only enacted once, when Congress passed a specific law to do so.
However, the economic climate of the 1970s brought about significant changes. The U.S. experienced unprecedented inflation due to a confluence of factors, including the decoupling of the dollar from the gold standard, escalating oil prices, and supply shocks. While workers saw some relief as wages increased with inflation, those on fixed incomes, particularly older individuals, struggled to keep pace.
Recognizing the financial strain this placed on beneficiaries, it became clear that Social Security needed to be indexed for inflation. This was crucial to ensure that those who relied solely on these benefits could continue to meet their financial obligations.
In response to these economic pressures, Congress was compelled to amend the Social Security program. They introduced a mechanism whereby benefit amounts increases would be automatically triggered by inflation. This led to the enactment of the Social Security COLA in 1972, which was implemented in 1975.
Understanding these nuances is key to navigating the complexities of Social Security benefits. It’s also a testament to the adaptability of the program in response to changing economic conditions.
COLA for 2023 and 2024
Social Security benefits are annually adjusted to account for inflation. For 2023 and 2024, retirees will see an 8.7% increase in their benefits, marking the largest inflation adjustment in four decades. This is a significant boost for the millions of elderly Americans grappling with the rapidly rising cost of living.
The cost-of-living adjustments applied to the benefit payments in January 2023 were calculated using the most recent inflation figures released by the government. The official adjustment was announced after the Labor Department reported a September Consumer Price Index (CPI) of 8.2%.
Medicare recipients also have good news: the standard Part B premium deducted from Social Security benefits will decrease in the coming year.
The cost-of-living adjustment, a valuable aspect of Social Security, will provide a substantial boost to approximately 70 million people in the United States in the coming year. Data from the Social Security Administration shows that in August, 52.5 million people over the age of 65 received benefits from the program.
This number rises to 17.9 million when including younger beneficiaries, such as survivors of insured workers, people receiving disability benefits, and people receiving Supplemental Security Income.
Is the COLA Amount Taxed?
In light of the recent COLA increase of 8.7% as of January, a significant number of retirees may find themselves obligated to pay income tax on a portion of their Social Security benefits. This is due to their new, higher income exceeding the thresholds set by the government.
The taxation of Social Security benefits was first introduced in 1984 as part of a reform package aimed at stabilizing the financial health of the Social Security program. This marked the first time that recipients’ benefits were subjected to taxation.
Interestingly, while most of the federal income tax system is adjusted for inflation, the income levels used to calculate the taxable portion of a person’s Social Security check have remained static. As a result, an increasing number of beneficiaries have found themselves required to pay income taxes on a portion of their benefits as the level of those benefits has risen over time.
The tax on Social Security benefits is calculated using a somewhat complex formula. The first step involves determining your combined income, also referred to by Social Security as your provisional income. This figure is the sum of your adjusted gross income, any tax-free interest you earned on investments, and 50% of your Social Security benefits.
For single taxpayers with a combined income of $25,000 or less, their benefits are exempt from taxation. For married couples filing jointly, this threshold is increased to $32,000.
Beneficiaries falling into the next income bracket, which ranges from $25,000 to $34,000 for single filers and $32,000 to $44,000 for married couples filing jointly, may find up to half of their benefits subject to taxation.
For beneficiaries with income levels exceeding these thresholds, up to 85% of their benefits may be subject to taxation. This means that, regardless of income level, at least 15% of your benefit will always be exempt from taxes. It’s important to understand these nuances to effectively manage your financial obligations.
Is COLA an Effective Solution?
The Social Security Administration provides a COLA to account for inflation. However, this increase is based on the prices of a hypothetical basket of consumer goods, which may not accurately reflect the actual living costs for Social Security recipients.
Research conducted by the Center for Retirement Research has found that retirees experience a loss in purchasing power in two distinct ways, even with the COLA.
Firstly, Medicare Part B premiums typically rise at a rate that outpaces inflation, leading to a net decrease in purchasing power. Secondly, since the Social Security tax threshold is not adjusted for inflation, a substantial COLA can result in a larger taxable amount.
A study by the Senior Citizen’s League, an advocacy group for retirees, revealed a stark contrast between the increase in Social Security benefits and the rise in typical senior expenses.
According to their findings, “While COLAs have boosted Social Security benefits by a total of 64%, typical senior expenses through March 2022 have grown at more than double that rate — a staggering 130%.” This discrepancy underscores the financial challenges many retirees face.
Other Adjustments to SSDI
While SSDI does make inflation adjustments, these are not based on changes in consumer prices. Instead, they are determined by shifts in wage levels.
The amount of your Social Security Disability benefit is primarily dependent on your total earnings throughout your working life. The Social Security Administration’s goal, according to their data, is to replace a specific percentage of your pre-retirement income. For a worker with a middle income, this typically equates to approximately 40%.
The Social Security Administration uses your Average Indexed Monthly Earnings (AIME) as a starting point to calculate your benefit. This figure is derived from your top 35 years of earnings, which is adjusted for inflation to account for the rising cost of living. An average is then calculated based on these years.
Your AIME is plugged into a formula to calculate what is known as the Primary Insurance Amount. This formula is weighted to ensure fair and equitable distribution of benefits. As a result, those with lower incomes receive a larger proportion of their pre-retirement earnings as a benefit compared to those with higher incomes.
Other Ways to Maximize Your SSDI Benefits
There are other ways you can maximize your benefits, some of which are discussed in this section.
Working Part-Time
Although working while receiving Social Security Disability benefits might not boost your monthly benefit amount, it could increase your income overall. The Social Security Administration offers a trial work period as an incentive for recipients of SSDI benefits to return to the workforce.
The nine months that make up a work trial don’t necessarily have to be in a row. The trial work period must be completed within 60 months.
If you earn more than $970 or put in more than 80 hours per month running your own business, that month will count toward your trial work period. The benefit of the trial work period is that you can earn as much money as you want without having to worry about losing your SSDI benefits.
If you were not participating in a trial period, having a monthly income of more than $1,470 demonstrates an ability to participate in substantial gainful activity (SGA).
This means that you would no longer be considered disabled for SSDI. If you are blind and receiving benefits, the SGA limit in 2023 is $2,460, rather than the $1,470 that applies to those with other types of disabilities. The SGA amounts will adjust yearly for the blind and non-blind claimants. In 2024, the SGA limit is $2,590 for claimants who are blind and receiving benefits, and $1,550 for those with other types of disabilities. Make sure to check the website to ensure you are not above the SGA limit.
After your trial work period ends, you have an additional 36 months during your extended period of eligibility to continue working without exceeding the SGA amounts. When you work during an extended period of eligibility, one thing you should be aware of is the possibility that some of the costs associated with your job will not be considered.
For instance, if you need counseling services or particular equipment, like a wheelchair, in order to be able to work, the cost of these things will be subtracted from the income that is considered when determining whether or not you are engaged in SGA.
If you go over your SGA limits and lose your benefits, you can apply for reinstatement without having to reapply or wait for a disability decision, which is the case with initial applications.
If you have been receiving SSDI and have had your payments abruptly stopped, you have five years to file a request for expedited reinstatement. Medicare coverage may continue even if your monthly benefits have stopped.
If you have any concerns about your ability to work while receiving SSDI benefits, an experienced SSDI attorney can help.
Applying for Family Benefits
Following the initiation of your SSDI payments, the following members of your family may be eligible to receive benefits based on your work history:
- Spouse
- Children
- Divorced spouse
- An adult child whose disability began before age 22
Your eligible family members may receive up to half of your SSDI payment. However, there is a limit on how much can be paid out to your family members in total. Your family’s total benefit payments cannot exceed between 150 and 180% of your SSDI payment.
If a spouse begins collecting the family benefit at the age of 62, they will not be eligible for an increase in those benefits when they reach the age of full retirement.
Benefits from Other Programs
If you are approved for SSDI, you will eventually become eligible for health care benefits through Medicare. Medicare coverage will begin two years after the Social Security Administration determines you are first entitled to receive benefits. There are situations in which you can qualify for Medicare in under two years.
Medicare is designed to help with medical costs, but it is not a free program. A portion of your SSDI check will be set aside to cover your monthly Part-B premiums. However, if you have a low income, most states will assist you in paying your premiums.
Appealing your Benefit Amount
The amount of your monthly SSDI payment will be specified in the letter you receive from Social Security after your application has been approved. You have 60 days from the date you receive your award letter to file an appeal if you believe that the monthly benefit award or the amount of back pay you are receiving needs to be corrected.
Conclusion
While it’s possible to have your SSDI benefit amount adjusted for inflation through the COLA, there are also other ways to maximize your monthly benefit amount. Consult an SSDI attorney to find out how you can receive the maximum benefits you are entitled to.
