As inflation continues to soar, many Americans have had to shift their spending. Even fixed income sources like Social Security benefits can be affected by inflation as well, and seniors could see some changes coming in 2023.
While we won't know for certain how inflation will affect Social Security until later this year, there are a few things retirees can look out for.
1. Retirees could see a much higher COLA
Every year, Social Security benefits receive a cost-of-living adjustment, or COLA. This adjustment generally falls between 1% and 3% per year to keep up with rising inflation.
This year, retirees saw a record-breaking COLA of 5.9%, which was the largest hike in decades. And because inflation has been so high, there's a good chance we'll see an even larger increase next year -- potentially up to 8.6%, according to some experts.
2. The earnings limit could get a lift
If you haven't yet reached your full retirement age (FRA) and you continue to work after claiming Social Security, you could temporarily lose your benefits depending on how much you're earning from your job.
When you earn more than a certain limit, your benefits will be either partially or completely withheld until you reach your FRA. In 2022, that limit is $19,560 per year (or $51,960 if you'll be reaching your FRA this year).
As these limits are tied to inflation, they'll likely go up in 2023. That means you could earn more without seeing your benefits reduced.
3. The maximum taxable earnings limit could increase
The maximum taxable earnings limit is the highest income that's subject to Social Security taxes. That limit is $147,000 per year in 2022, but because it's also tied to inflation, it will likely go up next year.
This change will mostly affect high earners, who will have to pay Social Security taxes on more of their income. If your income is well below the maximum taxable earnings limit, you likely won't see a difference in your taxes in 2023 as a result of this change.
4. The maximum benefit amount could rise
In 2022, the most you can collect from Social Security is $4,194 per month. This benefit amount is directly linked to the maximum taxable earnings limit, so if that limit goes up in 2023, the max benefit amount will likely increase as well.
Nobody can say for certain how much higher it might be. But to qualify for the max benefit, you'll need to work for at least 35 years, wait until age 70 to file for benefits, and consistently reach the maximum taxable earnings limit.
How to prepare
While an increase in Social Security across the board may sound like a positive thing, benefits have actually lost around 40% of their buying power in the last two decades -- even with annual cost-of-living adjustments.
In other words, Social Security doesn't go as far as it used to, and even if you receive larger checks in 2023, that doesn't necessarily mean you'll have more discretionary income.
If you can swing it, then, it may be wise to either reduce your spending or find ways to bulk up your savings. Social Security may not be as reliable in the future, and there's a chance you may need to rely more heavily on your nest egg.
There may not be anything you can do to control inflation and its impact on your benefits. But staying informed can make it easier to plan accordingly, regardless of what happens.