Every year, during the second week of October, retirees around the U.S. wait on proverbial pins and needles for the biggest announcement of the year from the Social Security Administration (SSA): The cost-of-living adjustment (COLA). COLA is the benefit boost Social Security's recipients receive most years that accounts for inflation.
On Oct. 13, 2022, the U.S. Bureau of Labor Statistics (BLS) provided the final inflation data point needed for COLA to be calculated for the upcoming year -- and what a COLA it turned out to be! According to the SSA, the program's nearly 66 million beneficiaries will receive an 8.7% cost-of-living adjustment. In nominal-dollar terms, it'll be the biggest payout increase on record for recipients, with the average retired worker, disabled worker, and survivor beneficiary netting a greater than $100 increase in their monthly payout next year.
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Social Security isn't just for retirees
But what you might not realize about Social Security is that it's not just for retirees. Although the program was founded in the 1930s with the intent of providing financial protection to aged Americans who could no longer work, an increasing number of seniors are remaining in the workforce for a variety of reasons.
Based on data provided by the BLS, the labor force participation rate for persons aged 65 to 74 has increased from less than 20% in 2001 to nearly 26% by 2021. Similarly, Americans aged 75 and older have seen their participation rate jump from 5.2% in 2001 to 8.6% in 2021. BLS projections for 2031 show participation rates for both groups continuing to rise.
Although these seniors can qualify for a retired worker benefit while remaining in the labor force, there are certain changes to Social Security announced each year that can apply to this group of workers. Here are two notable changes that could affect seniors who collect a Social Security benefit but remain in the labor force.
The retirement earnings test may come calling
Without question, the biggest Social Security change is one that could affect early filers. By "early filers," I mean eligible people aged 62 to 66 years and 11 months who chose to take their retired worker benefit prior to reaching full retirement age (FRA) -- the age where beneficiaries can receive 100% of their monthly payout.
Early filers can be subjected to what's known as the retirement earnings test. If a Social Security recipient's earnings surpass predetermined thresholds, the SSA can withhold some or all of their benefits. Once a beneficiary reaches their FRA, the retirement earnings test is no longer applicable, regardless of when they began taking their benefits.
The SSA breaks down early filers into two categories: Those who won't reach their FRA in the upcoming year and those who will. The retirement earnings test income thresholds vary pretty significantly between these categories.
In 2023, early filers who won't reach their full retirement age can generate $21,240 ($1,770/month) in earned income without the SSA withholding a single dollar. But for every $2 in wages and salary above this threshold, the SSA can withhold $1 in benefits. Next year's $21,240 income threshold is $140/month higher than in 2022.
For early filers who will reach their FRA in 2023, the earnings threshold is a more robust $56,520 ($4,710/month). Seniors who surpass this level prior to hitting their FRA next year will have $1 in benefits withheld for every $3 earned above it. For context, this $4,710/month income threshold represents a $380/month increase from this year.
For some working seniors, these increases mean they'll be able to double-dip and keep more of their total take-home pay (earned income plus Social Security income) in the upcoming year.
Additionally, keep in mind that withheld benefits are returned in the form of a higher monthly payout once an eligible beneficiary hits their full retirement age.
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A higher payroll tax earnings cap could mean bad news for high earners
The other big Social Security change that could affect people working and collecting a Social Security benefit is the coming adjustment to the payroll tax earnings cap.
The 12.4% payroll tax on earned income is what powers the Social Security program. In 2021, payroll taxes brought in $981 billion of the $1.09 trillion in total revenue collected by Social Security. The self-employed are responsible for the full 12.4% payroll tax, while employees working for a company split this tax liability with their employer.
This year, Social Security's payroll tax is applied to wages and salary between $0.01 and $147,000. This latter figure is what's known as the earnings cap. Any earned income above this amount is exempt from the payroll tax.
Social Security's payroll tax earnings cap is tied to the National Average Wage Index (NAWI). With the exception of years where no COLA is passed along, increases in NAWI have led to a steady climb in the maximum taxable earnings cap. In 2023, all wages and salary between $0.01 and $160,200 will be subject to the payroll tax.
For the 94% of working Americans bringing home less than $147,000 annually, this change has no bearing. But for the 6% of high earners who do hit the payroll tax earnings cap each year, this boost could result in extra taxation.
It's also worth mentioning that Social Security benefits are themselves taxable above certain income thresholds. While an 8.7% COLA is superficially good news for seniors, higher payouts put them on track to potentially owe more in taxes to the federal government.
