Social Security is our nation's most successful retirement program. In 2020, it was responsible for pulling nearly 22.5 million people out of poverty, and according to a recent survey from national pollster Gallup, it is vital to helping just shy of 90% of retirees make ends meet during their golden years.
Social Security is also a program that undergoes changes on a regular basis. During the second week of every October, the Social Security Administration releases a fact sheet detailing the changes that'll impact beneficiaries and the workers paying into the program in the upcoming year. This week marked that pivotal announcement.
What follows are the seven biggest changes to Social Security in 2023.
Image source: Getty Images.
1. Beneficiaries will receive their largest "raise" in 41 years
There's little question that the most-important change announced this week is the cost-of-living adjustment (COLA) for 2023. Social Security's COLA is the mechanism designed to adjust benefits to match the prevailing inflation rate, as determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Come January, Social Security's nearly 66 million beneficiaries will receive a whopping 8.7% "raise." You'll note "raise" is in quotation marks to reflect that this benefit increase is to match inflation and isn't the same as a pay raise you'd receive from an employer, which could potentially help you get ahead of the prevailing inflation rate.
On a percentage basis, this 8.7% COLA is the biggest year-over-year increase in 41 years and the fourth largest since the CPI-W became the program's inflationary tether in 1975. In nominal-dollar terms, it'll be the biggest increase in history. The average retired worker is estimated to see their monthly benefit climb by $146 in 2023 to approximately $1,827.
But before breaking out the champagne, consider that a sizable portion of this COLA is being gobbled up by historically high inflation. Additionally, the purchasing power of Social Security dollars has declined by an unsightly 40% since 2000. In other words, Social Security's cost-of-living adjustment isn't all it's cracked up to be.
2. High-earning workers will have to open their wallets a bit wider
It's not just beneficiaries who are impacted by Social Security's annual changes. High-earning workers are going to be on the line for more taxable income in 2023.
This year, Social Security's 12.4% payroll tax on earned income (wages and salary, but not investment income) was applicable between $0.01 and $147,000. The self-employed pay the entirety of this 12.4% payroll tax (up to $147,000), while workers employed by a company split this tax liability down the middle with their employer. The payroll tax provides Social Security with the lion's share of its revenue.
The maximum taxable earnings cap (the $147,000 figure) adjusts in lockstep with the National Average Wage Index most years. With workers enjoying substantial wage-pricing power, the maximum taxable earnings cap will rise from $147,000 in 2022 to $160,200 in 2023. For the 6% of workers who bring home more than $147,000 in earned income annually, this change could translate into as much as $1,636.80 in added payroll tax liability next year.
3. The rich are getting richer thanks to a beefier maximum payout
However, it's not all bad news being a high earner. Next year, the maximum monthly payout at full retirement age -- the age where eligible beneficiaries qualify for 100% of their retirement benefit -- is rocketing higher. Following a $197/month increase in 2022 to $3,345, lifetime high-earners will see the maximum benefit at full retirement age jump from $282/month to $3,627. For those of you keeping score at home, that's over $43,500 per year.
But in order to receive this maximum monthly payout from Social Security, three criteria need to be met. A worker would need to:
- Wait until their full retirement age before taking benefits.
- Work at least 35 years since the Social Security Administration takes into account a worker's 35 highest-earning, inflation-adjusted years when calculating their monthly retirement benefit.
- Hit or surpass the maximum taxable earnings cap in all 35 years considered by the Social Security Administration.
Only around 2% of workers end up qualifying for the maximum monthly payout at full retirement age.
Image source: Getty Images.
4. Withholding thresholds for early filers are increasing
Social Security is a program that incentivizes patience. Retirees who begin receiving their benefits prior to reaching full retirement age (e.g., between ages 62 and 66) are hit with a number of penalties. As an example, monthly payouts are permanently reduced for early filers.
Additionally, beneficiaries can be exposed to the retirement earnings test, which allows the Social Security Administration to withhold some or all of recipients' payout if they earn above preset income thresholds.
For instance, early filers who won't hit their full retirement age this year can have $1 in benefits withheld for every $2 in earned income above $19,560 ($1,630/month). For early filers who will hit their full retirement age in 2022, $1 in benefits can be withheld for every $3 in earned income above $51,960 ($4,330/month).
In 2023, these income thresholds are increasing, which means early filers can pocket more earned income without having some or all of their benefits withheld. Early filers who won't reach full retirement age can earn $21,240 ($1,770/month) next year without any withholding kicking in. Meanwhile, early filers who will reach their full retirement age can net up to $56,520 ($4,710/month) before any withholding begins.
The retirement earnings test is no longer applicable once a beneficiary reaches full retirement age.
5. Disability income thresholds are climbing
The second week of October is also, historically, good news for the disabled workers and their families who rely on a monthly payment from the program. As of September, roughly 8.95 million people were receiving a disability benefit, 7.7 million of which were disabled workers.
In 2022, non-blind disabled workers were allowed to bring in $1,350 in earned income without having their benefits stopped. But when the curtain opens on 2023, these same folks will be able to generate $1,470/month in earned income before their benefits would cease. That's up to an extra $1,440 in annual income.
The earning threshold is moving up sizably for blind disabled workers, too. This year, the monthly earnings cap before benefits cease is $2,260/month. In 2023, it'll rise to $2,460/month.
6. The bar to qualify for Social Security benefits is moving up
Something you might not realize about Social Security is that you're not automatically entitled to a benefit just because you're an American citizen. To receive a retirement benefit, as well as survivor and disability coverage, you'll have to earn work credits. A total of 40 lifetime work credits is needed to receive Social Security benefits, of which a maximum of four can be earned annually.
While this might sound like a lot of work (pardon the pun), it really isn't. In 2022, a work credit was granted for each $1,510 in earned income. Thus, a worker who generates $6,040 in earned income will receive the maximum of four lifetime credits this year.
This relatively low bar to qualify for benefits will be moving a bit higher in the upcoming year. In 2023, it'll take $1,640 in earnings to equate to a quarter of coverage, according to the Social Security Fact Sheet. To be awarded a full complement of four lifetime work credits, you'll need to earn $6,560 next year.
The taxation of benefits brought in more than $40 billion in revenue for Social Security in 2021. US Old-Age, Survivors, and Disability Insurance Trust Fund Income from Taxation of Benefits Receipts data by YCharts.
7. Retirees are likely to see their tax liability swell
The last big Social Security change isn't something you'll find on the recently released Fact Sheet, but it is nevertheless pertinent to a growing number of retirees.
Back in 1983, with Social Security's asset reserves running on fumes, Congress passed, and then-President Ronald Reagan signed into law the last major overhaul of Social Security. The Social Security Amendments of 1983 gradually increased the payroll tax and full retirement age, as well as introduced the taxation of benefits. Up to 50% of Social Security income became taxable when a worker's modified adjusted gross income (MAGI) plus one-half of benefits surpassed $25,000 (or $32,000 for a couple filing jointly).
In 1993, the Clinton administration added a second taxation tier. This new tier allows up to 85% of Social Security benefits to be taxed at the federal rate if the MAGI plus one-half benefits formula tops $34,000 for a single filer or $44,000 for a couple filing jointly.
Here's the catch: These income thresholds have never been adjusted for inflation. As cost-of-living adjustments have naturally increased monthly payouts over time, more and more retirees are being exposed to federal taxation on their benefits. With a historic 8.7% COLA on the way in 2023, it's only logical to expect the tax liability of a lot of Social Security beneficiaries to swell.
