Most retirees are now abundantly aware of the rapidly rising prices that characterize the current economic environment. As such, a working knowledge of the Social Security system and its related payment calculations is of renewed importance. To make things even more challenging, actuarial projections around Social Security are also constantly changing, which means covering retirement expenses is now like trying to hit a moving target.
Let's explore four Social Security changes you may or may not know about.
1. Reserves are expected to last until 2034
According to the Social Security Administration's (SSA) most recent annual report, retirees can expect to receive full benefits through 2034 -- a year later than previously thought. At that time, the SSA's reserve funds are expected to deplete, and future payments will cover 77% of currently scheduled benefits.
This is not to say that this will definitely happen, but without a change in tax law or other legislative action, the program would be able to pay only $0.77 on the dollar on scheduled benefits in a little over a decade from now. This is not meant to alarm, but it does put additional onus on the everyday retirement saver to ensure their personal savings is substantial enough to cover any shortfall.
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2. Benefits rose by 5.9% in 2022
Social Security benefits rose by 5.9% in early 2022, which represented a cost-of-living-adjustment (COLA) to account for decades-high inflation. Earlier in the year, this was considered an unusually high adjustment, given the minimal inflation numbers we've seen for the past several decades.
Further, there is a fair chance that benefits will rise even more next year, as we've seen this bout of inflation hit harder and last longer than previously expected. According to the Senior Citizens League, a nonpartisan advocacy group for seniors, the 2023 Social Security increase could hover in the 8.6% range.
Needless to say, higher prices are here to stay, and inflation has proven to be much more than transitory. Any positive adjustment to Social Security benefits to help ease the loss in purchasing power will be a welcome one for retirees.
3. The taxable wage base rose to $147,000
The maximum taxable wage base grew from $142,800 in 2021 to $147,000 in 2022. The "maximum taxable wage base" is the earnings level at which Social Security tax is no longer levied, meaning you'll only pay into the Social Security system on earnings up to $147,000 in 2022. This is different than Medicare tax, which is applied at all earnings levels.
This doesn't mean you have to have a salary of this amount to pay the maximum into the system. You can earn extra income in any number of ways, but you do have to declare it on your income tax return and voluntarily pay the associated Social Security tax to receive credit for retirement benefits.
It's not a surprise to see that the maximum taxable wage base grew, but it's a clear sign that you'll need to continuously earn more to have a chance at receiving the maximum possible Social Security benefit in retirement.
What the changes mean
Most of the changes we've seen to the Social Security benefits program -- with regard to the basic calculations -- were both expected and necessary. Higher prices in the economy necessitated meaningful increases in both benefit payments and taxation thresholds. But the idea that the Social Security system is facing a long run shortfall can leave pre-retirees with an uneasy feeling.
So you'll need to ensure your personal savings is sound enough to withstand the possibility of reduced benefit payments in the future. The longer you have until retirement, the more this is in your hands, so be sure to exercise control where possible and ensure you're socking away as much as you reasonably can.
