3 Changes to Social Security for New Retirees in 2023

Each year, about three million Americans start receiving Social Security retirement benefits, at which point they are called retirees by the Social Security Administration, regardless of work status. The decision to claim benefits should never be made lightly. Monthly Social Security checks are an important source of income for nearly 90% of retired workers, according to Gallup, and claiming benefits too early (or too late) can be a costly mistake.

Once you've made the decision to claim retirement benefits, you need to stay informed on the Social Security program. For instance, the Social Security Administration recently announced several important changes that will take effect next year.

Here's what you need to know if you plan to start retirement benefits in 2023.

Image source: Getty Images.

1. The maximum taxable earnings limit will increase

If you work at all next year -- before or after you claim retirement benefits -- you may pay more in Social Security taxes. Generally speaking, the maximum taxable earnings limit increases each year to account for wage inflation. For instance, up to $147,000 of income is subject to Social Security payroll tax in 2022, but that figure will rise 9% to $160,200 in 2023.

That means an extra $13,200 in income is subject to taxation next year. The tax rate is 12.4%, but employees only pay 6.2% (i.e., the employer pays the other half). That means anyone who makes at least $160,200 will pay an additional $818.40 in Social Security taxes in 2023.

2. The maximum Social Security benefit will be bigger

The size of your retirement benefit depends on lifetime earnings and age. Specifically, a formula is applied to your average, inflation-adjusted earnings from the 35 highest-paid years of your career. The output is your primary insurance amount (PIA), the benefit you will receive if you claim Social Security at full retirement age (FRA).

Anyone who claims benefits earlier than FRA receives a permanent reduction, and anyone who claims benefits later than FRA (up to age 70) receives a permanent increase.

The PIA formula is adjusted each year to account for wage inflation. That means the maximum benefit payable to new retirees typically increases from one year to the next. This chart shows the maximum benefit amounts for 2023.

Data source: Social Security Administration.

As a caveat, not many people actually get the maximum benefit. To qualify, your wages need to meet or exceed the maximum taxable earnings limit for 35 years. As mentioned, that figure is $147,000 in 2022.

Of course, most people won't know offhand whether they qualify for the maximum amount, but anyone can use the my Social Security portal to estimate their future benefit.

3. The retirement earnings limits will be higher, but a special rule applies to new beneficiaries

You can work while on Social Security, but your retirement benefit amount will be reduced if you are under FRA and your income exceeds certain limits. In 2023, the lower limit is $21,240, and the higher limit is $56,520. The lower limit applies to anyone under FRA for the entire year, while the higher limit applies to anyone that will reach FRA during the year.

Specifically, for individuals under FRA in 2023, $1 in benefits will be withheld for every $2 in earnings that exceed $21,240. And for individuals that reach FRA in 2023, $1 in benefits will be withheld for every $3 in earnings that exceed $56,520 prior to FRA. After you reach FRA, your benefit will not be reduced, regardless of how much you earn.

Those rules put new retirees in a tough spot -- anyone who leaves the workforce in the middle of the year may have already exceeded the relevant earnings limit. Fortunately, a special rule addresses that situation.

If you claim benefits next year, you can receive a full Social Security check in any month that you meet one of these qualifications:

• Under FRA for all of 2023: You make $1,770 or less during the month, and you did not perform substantial services in self-employment.
• Reach FRA in 2023: You make $4,710 or less during the month, and you did not perform substantial services in self-employment.

To clarify, "substantial services in self-employment" is defined as 45 hours of work per month for a general business, or between 15 hours and 45 hours of work per month for a business in a highly skilled occupation.

This retirement earnings calculator from the Social Security Administration can help you determine how much (if any) of your retirement benefit will be withheld if you stay in the workforce after starting Social Security.