Social Security is a major source of income for millions of older adults. For many, it's the sole income source in retirement. This means any changes to the program could have a significant impact on your financial situation.
Next year will be a big one for Social Security, with a historic cost-of-living adjustment (COLA) creating ripple effects across the program. But Social Security is also a hot topic in Washington, and some lawmakers have sweeping changes in mind. Here's what to expect.
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COLA 2023: More than just a benefit boost
Starting in January 2023, seniors will receive an 8.7% increase in benefits to help account for surging inflation this year. For the average retiree, that will amount to roughly $140 more per month.
But next year's COLA will affect more than just your monthly payments. It will also impact several other areas of Social Security, including:
- Higher earnings limits: If you continue working after filing for Social Security and you haven't yet reached your full retirement age, your benefits could be reduced if your wages surpass a certain limit. In 2023, that limit is increasing -- which means you can earn more before seeing benefit reductions.
- Higher wage cap: Not all income is subject to Social Security taxes. In 2022, only income up to $147,000 per year is taxed for Social Security purposes. But in 2023, that cap will increase to $160,200 per year. In other words, high earners could start paying more in Social Security taxes starting next year.
- Higher maximum benefit: Your benefit amount will depend on several factors, including your earnings, the length of your career, and the age you file. But there is a maximum you can collect. In 2022, that max is $4,194 per month, but as a result of the higher COLA, it will increase to $4,555 per month in 2023.
All Social Security beneficiaries will experience the effects of at least some of these changes, even if it's just the historic raise from the 2023 COLA. But there could be even bigger shifts on the horizon.
What does the future of Social Security look like?
One of the most pressing problems the program is facing right now is its cash shortage.
Social Security is funded primarily through payroll taxes. Current workers pay into the program through taxes, and that money is paid out to today's retirees in benefits. When today's workers retire, younger workers will fund their benefits through taxes.
However, the Social Security Administration (SSA) has been paying out more in benefits than it's receiving from taxes, which has created a deficit. To cover that gap, it's been dipping into its trust funds -- which has allowed it to continue paying benefits in full despite the shortfall.
The SSA expects those funds to be depleted by 2035, though, according to its latest estimates. Once that happens, taxes and other sources of income will only be enough to pay out around 80% of scheduled benefits.
The good news is that Social Security isn't going bankrupt. As long as workers continue paying taxes, there will always be some money to pay out in benefits. But if nothing changes in the next decade or so, seniors could see a 20% benefit cut by 2035.
Washington's big ideas for Social Security
Fortunately, lawmakers are starting to feel the pressure to do something about this cash shortfall, and many have proposed potential solutions.
Currently, nothing is set in stone, and there are no new laws in place just yet. However, some of the proposed solutions include:
- Raising taxes for higher earners: Right now, only income up to $147,000 per year (or $160,200 per year in 2023) is subject to Social Security taxes. But some lawmakers have proposed taxing income above $400,000 per year as well, which would dramatically increase the program's funding and allow for more money to be paid out in benefits.
- Raising the full retirement age (FRA): The FRA is currently between ages 66 and 67, but some politicians have suggested increasing it to age 68 or even 70. This means seniors would have to wait longer to receive their full benefit amounts, which would decrease Social Security's expenses.
- Increasing the payroll tax: Other lawmakers have also suggested raising the payroll tax itself from 6.2% to 6.5%. This would impact all tax-paying Americans regardless of income and increase the program's funding.
Again, none of these proposals are law just yet, and it's unclear when Congress will come to an agreement about anything. But as we get closer to potential benefit cuts in 2035, Washington will likely feel increased pressure to find some sort of solution.
Until then, the best thing you can do is stay informed and consider how these changes could affect your own situation.
