For months, experts have been predicting that seniors on Social Security will receive a giant cost-of-living adjustment (COLA) in 2023 due to rampant inflation. Granted, it's too soon to pinpoint exactly what that raise will look like since it's based on third-quarter inflation data. But it's fair to assume that seniors will get a nice boost to their benefits.
But that's not the only Social Security change expected to come down the pike in 2023. There's another big change workers should expect -- but it may not be a pleasant one.
Prepare for an uptick in Social Security taxes
Social Security's primary revenue source is payroll taxes -- the ones that come out of workers' paychecks. Each year, there's a wage cap put into place that limits the amount of income on which workers have to pay Social Security taxes.
This year, that wage cap is $147,000, which means that earnings beyond that point don't get taxed for Social Security purposes. In 2021, the wage cap was lower -- $142,800.
But the wage cap tends to rise from one year to the next as wages increase. So come 2023, workers who are on the hook for Social Security taxes could see that burden rise.
Just as it's too soon to predict what next-year's Social Security COLA will look like, it's also too early to determine what 2023's wage cap will look like. But if it jumps by $4,200 like it did last year, that would leave workers facing taxes on $151,200 of income.
Social Security taxes are implemented at a rate of 12.4%, and salaried workers split that obligation with their employers. As such, workers earning $151,200 or more could end up paying about $9,374 in Social Security tax, with their employers picking up that same tab. That's up from $9,114 this year. Self-employed workers, however, are responsible for their entire Social Security tax bill.
To be clear, we don't know that next-year's wage cap will be $151,200, so these calculations are only an example. The point, however, is that the wage cap tends to increase from one year to the next, so workers should expect to pay more into Social Security come 2023.
For most people, that's probably not welcome news. But let's remember that Social Security is reliant on payroll taxes to stay afloat. While workers may not be thrilled with the idea of losing more money to taxes, they can take some comfort in the fact that they're helping to ensure that Social Security will be around to pay benefits for many more years to come.
Could the wage cap get lifted in the future?
Because Social Security is facing its share of financial challenges, some lawmakers have proposed lifting the wage cap so that workers pay taxes on all of their earnings. That solution is very much a mixed bag, and one that not everyone supports. But it can also help workers put a 2023 wage-cap increase into perspective because a rise in the wage cap creates a more favorable tax situation for higher earners than not having a wage cap at all.