Social Security is an important benefits program. Both those currently receiving retirement income as well as current workers need to be aware of how it works.
Specifically, there are a few very important changes happening in 2023 that you need to know about and prepare for. Here's what they are.
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1. Retirement benefit checks are going to be higher
Social Security beneficiaries are going to get a lot more money in their checks starting in 2023. That's because of a big cost-of-living adjustment (COLA).
COLAs happen in most years. The purpose of them is so seniors don't lose buying power. Since the price of goods and services naturally increases over time, benefits have to go up or retirees would see their checks buy much less. The formula used to calculate COLAs is based on changes in a consumer price index, which showed a big surge in inflation when it was last measured. As a result, retirees will get an 8.7% raise next year.
This is the largest year-over-year benefits bump in 40 years. While that may seem like good news, though, seniors should remember this increase is just meant to help them cope with rising prices. So, you may not be able to purchase more even though your checks get bigger since the things you buy will be more expensive, too.
2. Seniors can work more without losing part of their benefits
If you claim Social Security benefits prior to your designated full retirement age (FRA), you have to be careful if you want to work while collecting those checks. That's because if you earn too much, you end up temporarily forfeiting some benefits.
The good news is, the threshold at which benefits are affected is increasing in 2023:
- If you won't reach your full retirement age all year, you can earn up to $21,240, or $1,770 per month before benefits are affected. Above this amount, you'll lose $1 in benefits for every $2 in excess wages. This is an increase from the $19,560 limit in 2022.
- If you will reach FRA some time during the year, you can earn up to $56,520, or $4,710 per month before benefits are affected, and will lose $1 in earnings for every $3 above that amount in 2023. This is up from $51,960 in 2022.
The fact you can earn a little extra income without worrying about forfeiting benefits may come as a relief for many seniors who are hoping to rely on both a paycheck and Social Security for support. This doesn't affect those who have already reached full retirement age, though, since you can work as much as you want if that's your situation.
3. You'll need to earn more to get a work credit
To become eligible for Social Security in the first place, you need 40 work credits (unless you're claiming on a spouse's work history). You can earn a total of four work credits per year, but need to make a certain amount of money to do so.
In 2022, you could earn one work credit for each $1,510 you earned (up to that maximum of four per year). But in 2023, you won't earn a work credit until you've made $1,640. This is a significant increase and it could mean more lower earners or part-time workers aren't able to max out their credits this year.
4. Current high earners could get hit with higher tax bills
Finally, higher-earning current workers could be affected by a big change as well.
Social Security taxes are charged only on income up to a certain threshold, called the wage base limit. In 2022, this limit was $147,000. In 2023, however, it's going up to $160,200. This means workers will face Social Security taxes on as much as $13,200 in additional income that was untaxed in 2022.
All of these changes will make a big impact on current and future retirees, and you should be sure to plan for them if they'll affect your pocketbook.
