Although Social Security has been around for many decades, the program tends to undergo changes every year. Some of those changes can be positive in nature. Others, not so much.
Come 2023, things could look very different on the Social Security front. But while some of the changes we can expect are positive in nature, there's one change that could end up making workers pretty unhappy.
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Positive change #1: A higher cost-of-living adjustment
Social Security benefits are subject to an annual cost-of-living adjustment, or COLA, the purpose of which is to help seniors maintain their buying power as inflation drives the cost of living upward. Last year, Social Security recipients got their largest raise in decades -- a 5.9% COLA. But that might pale in comparison the COLA that comes through in 2023.
Inflation has soared over the past seven months, and that's already setting the stage for a 2023 COLA that could make 5.9% look stingy. Granted, we won't know what next year's COLA looks like until October, because it's based on third quarter inflation date. But some estimates are calling for a COLA of almost 11%. And even more conservative estimates are looking at a COLA in the mid-8% range.
Positive change #2: A higher earnings-test limit
Seniors who receive benefits from Social Security are allowed to collect a paycheck from a job at the same time. But those who work and collect benefits before reaching full retirement age are subject to an earnings-test limit, and wages brought in above that limit result in withheld benefits.
This year, the earnings-test limit is $19,560. For seniors reaching full retirement age in 2022, it's $51,960.
Next year, the earnings-test limit is likely to rise to account for wage growth. We don't know exactly what it will look like, but seniors can bank on it being higher, which means they'll get a little more leeway to earn money before having to worry about benefits being withheld.
And the not-so-positive change
Social Security is largely kept afloat by payroll taxes -- the ones that come out of our earnings during our working years. Each year, there's a wage cap put into place that determines how much income is subject to Social Security taxes.
This year, the wage cap sits at $147,000 , and earnings beyond that point aren't taxed for Social Security purposes. But just as the earnings-test limit is likely to rise in 2023 to account for wage growth, so too is the wage cap apt to increase.
Now, again, we can't predict how much of an increase workers will be looking at right now. But it's fair to assume that higher earners will end up parting with even more of their money come 2023.
Prepare for what lies ahead
The fact that Social Security tends to change with the times is a good thing. If COLAs didn't exist, for example, recipients would automatically lose buying power through the years, even during periods of modest inflation.
But it's important to stay informed about Social Security to know what to expect. This holds true for both retirees and workers alike. The reality is that Social Security changes can impact people across a range of ages, and knowing what's coming -- for better and for worse -- could help everyone better prepare.
