Each year some important changes happen to the Social Security benefits program. These affect both current retirees as well as workers who are going to collect benefits in the future.
But while many things will look different in 2023, there's one rule that will stay the same. And the fact that this one aspect of the program doesn't change at all is really bad news for retirees.
These are the Social Security changes to expect in 2023
Social Security rules on a variety of issues change each year as a result of inflation. For example:
- Retirees get periodic Cost of Living Adjustments (COLAs) so their benefits don't lose buying power as prices increase. Seniors will get one of these raises in 2023.
- The maximum income subject to Social Security tax will increase in 2023. This is the maximum amount of money that workers pay Social Security tax on, and the maximum amount of income that will count when their retirement benefit is eventually calculated. This increase will happen due to wage growth.
- The maximum monthly benefit will increase in 2023. This increase is also driven by wage growth, as well as by the COLAs that occur.
- Retirees will be able to earn more money without forfeiting Social Security benefits if they are working prior to their full retirement age while collecting benefits at the same time. That's because the income threshold at which workers begin to forfeit part of their benefits will go up.
These Social Security changes happen automatically based on the design of the program. For example, the COLA formula uses a consumer price index to assess rising costs and then increase seniors' benefits accordingly.
Without these changes, inflation would eat away at the value of benefits. People would be able to earn very little in retirement before losing benefits. And the average earnings that are used to calculate benefits would decline dramatically since only earnings up to the taxable maximum are counted.
And this is the rule that will stay the same
While most of the rules built into the Social Security benefits program are designed to make sure that inflation doesn't cause the benefits program not to work as planned, there's one rule that won't change. It relates to who has to pay taxes on Social Security benefits.
Originally, benefits were tax-free. But in 1983, a rule change designed to ensure the program's solvency imposed taxes on up to 50% of benefits for certain high earners. Further changes in 1993 made up to 85% of benefits taxable for some retirees. When these rules were put into place, though, the thresholds at which benefits become taxable were not indexed to inflation -- unlike most of the other key income-related rules applicable to Social Security.
The tax rules that were put into place said that retirees who had countable incomes above $25,000 as single filers or $32,000 as married joint filers would be taxed on up to 50% of benefits. And single tax filers with a countable income above $34,000 or married filers with an income above $44,000 would be taxed on up to 85% of benefits. Countable income is half of Social Security benefits, some non-taxable income, and all taxable income.
Unfortunately, these income limits have not changed for decades. And that's a huge problem. Originally, fewer than 10% of beneficiaries were subject to this tax because it was supposed to affect only the wealthy. But as wages and benefits have increased to keep pace with rising inflation, more and more retirees have had to cope with federal taxes on their Social Security.
The Senior Citizens League found about half of households would owe these taxes in 2022. And with next year's Social Security raise expected to be one of the highest in four decades due to surging inflation, even more older Americans are likely to find themselves above the thresholds where their benefits become taxable next year.
This is bad news for the growing number of retirees who are going to find themselves sending money to the IRS instead of using it to cover other life necessities during a time when costs are going up. Retirees need to plan for this, especially if they will be subject to new taxes they never had to pay in the past.