Over 50 million Americans rely on Social Security for at least part of their retirement income. That makes it a critical part of the country's overall retirement infrastructure. Yet despite its importance to so many current and prospective retirees, the program is in trouble. According to its most recent trustees' report, Social Security's trust funds are expected to run out of money by 2035, forcing major benefits cuts, tax hikes, or some combination of the two.
With that stark reality in mind, it's important to know what to expect from Social Security in 2023 -- just a dozen years before that expected day of reckoning. What happens next year and the few years after that will determine whether that 2035 projection will end up being overly ambitious, overly conservative, or just about right. Here are four changes you can expect to happen to Social Security in 2023.
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1. Benefits are going up, a lot
Existing beneficiaries are expected to receive an 8.7% increase to their payments in 2023, thanks to the program's annual inflation adjustment. As of October 2022, the typical retiree received $1,676.53 per month in benefits. Add 8.7% to that amount, and the average monthly benefit will be in the neighborhood of $1,822.39 starting in January 2023.
As nice as that may feel, remember that Social Security's payment increases are designed to reflect the inflation that people have already lived through within the past year. As a result, recipients shouldn't expect their lifestyles to improve as a result of that annual increase.
2. Recipients may see a slightly larger boost due to Medicare Part B
Most people who receive both Social Security and Medicare have their Medicare Part B premiums directly deducted from their Social Security benefits. The standard monthly Medicare Part B premium is actually dropping to $164.90 in 2023 from $170.10 in 2022. That extra $5.20 per month may not seem like much, but every little bit counts.
That has the potential to be especially beneficial in the future. There's a "hold harmless" clause when it comes to the interaction between Medicare Part B premiums and Social Security. If your Medicare Part B premiums are deducted from your Social Security check, any increases in your base Medicare Part B premiums can't be more than the increase in your Social Security benefit. Note that the hold harmless provision doesn't apply if you pay an income-related surcharge to your Medicare Part B premium.
3. The Social Security payroll tax will be collected on higher income levels
Social Security's benefits are largely paid for by taxes that working people pay on their salaries. In 2023, people will pay Social Security taxes on the first $160,200 of their salaries, up from $147,000 in 2022. That $13,200 represents the largest dollar increase in compensation subject to Social Security taxes in the program's history. For higher income earners affected by that limit, it's a $1,636.80 tax increase (half paid directly by the taxpayer, half paid by the employer on the taxpayer's behalf).
That increase can help Social Security in the short run, as it means the potential for more revenue coming into the system to pay current benefits. It's less of a benefit to Social Security in the long run, however, since people's benefits are based on their covered salaries during their working years. As a result, the people paying higher taxes now will be eligible for higher benefits later when they themselves collect.
4. Social Security will likely tick another year closer to its day of reckoning
As mentioned above, according to the most recent Social Security trustees' report, the program's trust funds are on track to empty by 2035. That's only 12 years away from 2023.
All that said, Social Security's projections assume an inflation rate of 4.54% for 2022, 2.33% for 2023, and 2.4% from there on out. As is evidenced by the massive increase recipients are expecting for 2023, inflation was higher than expected in 2022. In the official Social Security projection, inflation is actually good for the program's trust funds, since the higher taxes are received now, but the higher benefits are paid out later.
That might make sense if that inflation is paired with a generally healthy economy and higher wages. In an inflationary environment marked with economic stagnation -- or stagflation -- the impact can actually be detrimental on Social Security's trust funds' health. This is because benefits rise based on inflation, but the program's tax revenue increases based on rising salaries. If salaries don't keep up with that inflation due to slow or negative economic growth, it could bring the trust funds' emptying date closer.
Treat Social Security like it's designed to be treated, and you'll likely end up fine
Despite the very important role that Social Security plays in so many people's retirement plans, it's important to remember that it was never designed to be your sole source of retirement income. On average, it covers around 40% of people's pre-retirement incomes -- a higher percentage for low-income workers and a lower percentage for high-income workers.
With that perspective in mind, it was already important to have a plan in place to cover the portion of your retirement needs that Social Security won't. If you already have such a plan in place, then it's pretty straightforward to make minor adjustments to it based on what you expect to see happen in 2023.
If you don't, then let the changes in Social Security in 2023 be a wakeup call to get your plan in place now. The sooner you do, the easier it will be to make the adjustments you'll need to get yourself in place for a financially comfortable retirement.
