To some degree, Social Security payments can help insulate retirement incomes against inflation. For example, the cost-of-living adjustment (COLA) this year was 5.9 percent, due to the considerable inflation we saw in 2021. But with inflation continuing to accelerate, will we see an even larger COLA in 2023?

It’s possible. The Senior Citizens League has predicted that the COLA for 2023 could be as high as an 8.7 percent “raise” for retirees. But matters aren’t so simple. Here’s what you need to know about the possible historic increase in Social Security payments.

The Social Security Administration uses data from the third quarter of the year to determine the COLA for the following year. So while estimates have fluctuated, we don’t yet know exactly what the payment adjustment will be. It could be a bit less than predicted.

Also, taxation is a potential problem for some retirees. Social Security payments are not taxed unless your overall taxable income exceeds certain income thresholds. But with a 8.7 percent COLA representing a potentially large increase in checks, some retirees could find themselves exceeding those thresholds for the first time. Some of that income increase could be reclaimed by Uncle Sam in the form of income taxes.

Finally, COLAs are not always accurately calculated for a retiree’s budget. The Administration uses an inflation index that does not always adequately reflect the spending of the average retiree, because the index focuses on purchases made by working-age individuals. For retirees, things like housing and the cost of healthcare are much more impactful on their budgets.

So if inflation in those areas exceeds the average rate of inflation, retirees are disproportionately affected. Therefore, the increase in Social Security payments doesn’t necessarily account for the average retiree’s actual spending.

Still, a significant COLA could represent good news for many. For more information on keeping more of your income safe from things like taxes and inflation, let’s meet regularly to discuss your retirement plan.