In 2023, Social Security is going to look different. Changes won't happen because of any big legislative moves, but instead because some modifications are built right into the program itself and happen automatically.
So, what should seniors expect of their retirement benefits next year? Here are four big changes that should be on your radar.
1. A generous COLA
Retirees receive periodic COLAs when they are on Social Security. COLA stands for Cost of Living Adjustment, and it's an increase in benefits meant to ensure seniors maintain their buying power even as inflation drives costs up.
Inflation has been surging this year, so retirees are likely to get a huge COLA. The 2023 benefits increase could be around 10.8%, so a senior receiving the average $1,661 benefit could get about $180 more in their monthly checks.
2. An increase in the wage base limit
Each year, workers pay Social Security taxes on income up to a certain limit, called the wage base limit. In 2022, the limit is $147,000. If you earn above this, no additional Social Security tax is owed, and no income above this threshold is counted when your benefits are ultimately calculated as a retiree.
The wage base limit is linked to the National Average Wage Index (NAWI), which is almost definitely going to increase. As a result, a larger amount of income is likely going to be subject to Social Security tax next year.
3. A later full retirement age
Retirees have a standard Social Security benefit based on average wages. This standard benefit is paid out only to those who get their first retirement benefit at a designated age called full retirement age (FRA).
FRA was 65 when the Social Security benefits program was first created, but it isn't that young any more. Thanks to amendments passed in 1983, FRA has been gradually getting older. And that will happen again next year.
For anyone born in 1956, FRA was 66 and four months. But for anyone born in 1957 or after, it's 66 and 6 months. For those born in 1958, it's 66 and 8 months, and retirees with a 1959 birthday will have to wait until they are 66 and 10 months old to be eligible for their standard benefit. Finally, anyone born in 1960 or after is going to have to wait until 67 to avoid seeing their checks reduced due to early filing.
This means people who are going to turn 66 next year have to wait a full two months longer than their peers did this year to get their standard benefit.
4. Higher thresholds for working while collecting benefits
Finally, retirees are currently subject to temporary forfeiture of their Social Security benefits if they earn too much money by working while collecting benefits. This rule applies only to people who are working before reaching their full retirement age.
The thresholds at which retirees start to have benefits withheld are adjusted periodically, and surging inflation and strong wage growth mean seniors will likely be able to earn more next year before they're affected by this rule.
Current and future retirees need to be aware of these pending changes so they can be prepared when making their retirement plans for 2023.