Whether you're already retired or currently in the labor force, chances are that Social Security will play a key role in helping you make ends meet during your golden years.
Earlier this year, national pollster Gallup surveyed nonretirees and retired workers to get a sense of their current or expected reliance on Social Security income. Gallup's polling found that 89% of current retirees rely on their benefits as a "major" or "minor" source of monthly income. 84% of nonretirees expect to lean on Social Security income to some varied degree when they hang up their work coat for good.
Because Social Security plays such a vital role in the financial well-being of tens of millions of Americans, it's wise to pay close attention to the many changes in this dynamic program. Although 2023 will mark the first time in seven years that Social Security's full retirement age will remain unchanged, the upcoming year should bring six big changes.
1. A historically high cost-of-living adjustment
The big change that Social Security's more than 65 million beneficiaries are probably most interested in is the historically high cost-of-living adjustment (COLA) that awaits in 2023. Think of COLA as the "raise" beneficiaries receive that's designed to keep them on par with inflation. In other words, if the price of goods and services rises, Social Security benefits should, ideally, rise by the same amount.
According to Mary Johnson, a Social Security policy analyst at The Senior Citizens League (TSCL), a nonpartisan senior advocacy group, the program's COLA could come in at a sizzling 8.6% for 2023. This implies that the average retired worker would receive a $145 monthly benefit increase next year. To put this into context, it would be the largest nominal-dollar jump ever, and the biggest year-over-year percentage increase in COLA in 41 years.
But keep the champagne on ice. Higher expenses are liable to gobble up most or all of this benefit increase in the upcoming year.
To make matters worse, Social Security's COLA measure, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), does a poor job of accounting for the inflation seniors are contending with. Since 2000, the purchasing power of Social Security income has plunged by 40%, according to TSCL.
2. Well-to-do workers are practically certain to open their wallets a bit wider
Millions of working Americans can also expect to hand over more of their earned income in the upcoming year.
The bulk of revenue that funds Social Security is generated from the 12.4% payroll tax on earned income (wages and salary, but not investment income). If you work for a business or someone else, you and your employer split this tax down the middle (6.2% each). If you're self-employed, the full 12.4% payroll tax is your responsibility.
In 2022, all earned income between $0.01 and $147,000 is subject to the payroll tax. Meanwhile, earnings above $147,000 are exempted from this tax. This maximum taxable earnings cap is tethered to the National Average Wage Index (NAWI), which is pretty much certain to increase. The year-over-year percentage increase in the NAWI determines how much the maximum taxable earnings cap will rise in 2023.
Increasing this earnings tax cap won't alter what the vast majority of workers pay into the program. However, it will cause the well-to-do to open their wallets a bit wider.
3. Maximum monthly benefits appear set to climb
Although high-earning workers are expected to pay more into Social Security next year, well-to-do retirees can probably expect to collect more.
This year, the maximum collectable Social Security benefit for a worker at full retirement age is $3,345/month. That's up $197/month (from $3,148/month) from the previous year. With inflation and wages soaring, it's all but a given that the maximum payout at full retirement age will increase substantially in 2023.
To be fair, only a small percentage of retired workers receive the program's maximum monthly payout. That's because it requires three criteria to be met. A retiree would need to:
- Wait until full retirement age to claim benefits.
- Work a minimum of 35 years, since a worker's 35 highest-earning, inflation-adjusted years are used to calculate their monthly benefit.
- Reach or surpass the maximum taxable earnings cap for all 35 years.
4. Disability income thresholds should increase
Though retirement benefits account for more than three-quarters of all program disbursements, over 9 million people also receive benefits from Social Security's Disability Insurance Trust. In addition to a historically high monthly benefit increase, those who receive disability income are liable to witness an increase in their withholding thresholds in 2023.
In simple terms, the Social Security program has drawn a line in the sand that represents the maximum amount disabled workers can earn each month while still receiving their benefit. This year, non-blind disabled workers can earn up to $1,350 a month. Meanwhile, disabled blind beneficiaries are able to take home up to $2,260 each month. Cross above these thresholds and disabled-worker benefits cease.
Using historically high inflation as a guide, the expectation should be that these disability income thresholds will climb in 2023. This will allow disabled workers to earn more each month without having their benefits stopped.
5. Withholding thresholds for early filers are likely to jump
You might not realize it, but Social Security penalizes retirees for taking their payout before reaching full retirement age (FRA). One of these "penalties" comes in the form of the retirement earnings test, which allows the Social Security Administration (SSA) to withhold some or all of a beneficiary's payout, depending on their earned income.
Retired workers who took their payout before reaching FRA, and who won't reach FRA in 2022, can have $1 in benefits withheld for every $2 in earned income above $19,560 ($1,630/month) this year. For early filers who will reach FRA at some point in 2022, the SSA can withhold $1 in benefits for every $3 in earned income above $51,960 ($4,330/month).
With high inflation and strong wage growth as catalysts, both income thresholds for early filers should jump in 2023. So early filers should be able to earn more without being penalized.
One final thing to note about the retirement earnings test: It's no longer applicable once a retired worker reaches FRA.
6. The bar to qualify for Social Security benefits is expected to rise
The sixth and final Social Security change to expect in 2023 is for lifetime work credits to become a little tougher to earn.
To qualify for Social Security benefits, Americans need to earn 40 lifetime work credits. Each year, a maximum of four credits can be earned, with income dictating how many credits a worker receives.
In 2022, every $1,510 in earned income equates to a single work credit. Thus, $6,040 in salary or wages this year would net a worker the maximum four credits. As you can see, even part-time income over the course of 10 years can be enough to qualify a worker for Social Security benefits.
However, the amount to net a single lifetime work credit has been steadily rising. Five years ago, it was $1,300. Next year, it'll almost certainly be higher than $1,510. Workers will have to put in a little extra effort to ensure they qualify for benefits.