Who’s ready for 6 big changes to Social Security in 2023? | Smart Change: Personal Finances


(Sean Williams)

Whether you are already retired or currently on the job market, there is a good chance that Social Security will play a key role in helping you make ends meet during your golden years.

Earlier this year, national pollster Gallup polled non-retirees and retirees to get a sense of their current or projected reliance on Social Security income. The Gallup poll found that 89% of current retirees rely on their benefits as a “major” or “minor” source of monthly income. 84% of non-retirees expect to rely on Social Security income to varying degrees when they hang up their work coat for good.

Since Social Security plays a vital role in the financial well-being of tens of millions of Americans, it is wise to pay close attention to the many changes in this dynamic program. Although 2023 will mark the first time in seven years that Social Security full retirement age will remain unchanged, the coming year is expected to bring six big changes.

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1. A historically high cost of living adjustment

The big change that probably matters most to the more than 65 million Social Security recipients is the historically high cost of living adjustment (COLA) that awaits in 2023. Think of the COLA as the “increase” that recipients receive and which is designed to keep them on par with inflation. In other words, if the price of goods and services increases, social security benefits should, ideally, increase by the same amount.

According to Mary Johnson, a social security policy analyst at the Senior Citizens League (TSCL), a nonpartisan seniors advocacy group, the program’s COLA could intervene at a sizzle of 8.6% for 2023. This implies that the average retired worker would receive a monthly benefit increase of $145 next year. To put that into context, that would be the biggest nominal jump in the dollar alreadyand the largest year-over-year percentage increase in COLA in 41 years.

But keep the champagne chilled. Higher spending is likely to eat up most or all of this increase in benefits over the coming year.

To make matters worse, the COLA measure of social security, the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W), does not properly account for the inflation at which the elderly are confronted. Since 2000, the purchasing power of Social Security income has 40% dippedaccording to TSCL.

2. Affluent workers are almost certain to open their wallets a little more

Millions of American workers can also expect to give away more of their earned income in the coming year.

Most of the revenue that funds Social Security comes from the 12.4% payroll tax earned income (wages and salaries, but not investment income). If you work for a company or someone else, you and your employer split this tax in half (6.2% each). If you are self-employed, the full payroll tax of 12.4% is payable by you.

In 2022, all income earned between $0.01 and $147,000 is subject to payroll tax. Meanwhile, income over $147,000 is exempt from this tax. This cap on maximum taxable earnings is tied to the National Average Wage Index (NAWI), which is almost certain to rise. The year-over-year percentage increase in NAWI determines by how much the maximum taxable earnings cap will increase in 2023.

Raising this income tax cap will not change what the vast majority of workers contribute to the program. However, this will encourage the wealthy to open their wallets a little more.

3. Maximum monthly benefits look set to climb

Although higher-earning workers are expected to contribute more to Social Security next year, wealthy retirees can probably expect to collect more.

This year, the maximum Social Security benefit to be collected for a worker at full retirement age is $3,345/month. This is up to $197/month (from $3,148/month) from the previous year. With inflation and soaring wages, it is almost certain that the maximum payout at full retirement age will increase significantly in 2023.

To be fair, only a small percentage of retired workers receive the maximum monthly payment from the program. Indeed, three criteria must be met. A retiree should:

  • Wait until full retirement age to claim benefits.
  • Work at least 35 years, since a worker’s 35 highest earning years, adjusted for inflation, are used to calculate their monthly benefit.
  • Meet or exceed the maximum taxable earnings cap for 35 years.

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4. Disability income thresholds should increase

Although retirement benefits account for more than three-quarters of all program disbursements, more than 9 million people also receive retirement benefits. Social Security Disability Insurance Trust. In addition to a historically high monthly increase in benefits, people receiving a disability pension are likely to see an increase in their withholding thresholds in 2023.

Simply put, the Social Security program has drawn a line in the sand that represents the maximum amount workers with disabilities can earn each month while receiving their benefits. This year, non-blind disabled workers can earn up to $1,350 per month. Meanwhile, disabled blind beneficiaries can take home up to $2,260 per month. Cross these thresholds and the disabled worker’s allowances cease.

Using historically high inflation as a guide, these disability income thresholds should be expected to rise in 2023. This will allow disabled workers to earn more each month without having their benefits cut off.

5. Withholding thresholds for early filers are likely to jump

You may not realize it, but Social Security penalizes retirees for having received their payment before reaching full retirement age (FRA). One such “penalty” comes in the form of the retirement income test, which allows the Social Security Administration (SSA) to withhold part or all of a beneficiary’s payment, according to their professional income.

Retired workers who received their payment before reaching FRA and who will not reach FRA in 2022 may have $1 withheld in benefits for every $2 of earned income above $19,560 ($1,630/month ) This year. For first-time filers who will reach FRA sometime in 2022, SSA may withhold $1 in benefits for every $3 of earned income above $51,960 ($4,330/month).

With high inflation and strong wage growth as catalysts, both income thresholds for early filers are expected to jump in 2023. Thus, early filers should be able to earn more without being penalized.

One last thing to note about the retirement income test: it is no longer applicable once a retired worker reaches FRA.

6. The bar for qualifying for Social Security benefits should rise

The sixth and final Social Security change to come in 2023 concerns lifetime work credits for become a little harder to win.

To qualify for Social Security benefits, Americans must earn 40 lifetime work credits. Each year, a maximum of four credits can be earned, with income dictating the number of credits a worker receives.

In 2022, every $1,510 of earned income equals one work credit. So $6,040 in salary this year would earn a worker the maximum four credits. As you can see, even part-time income over 10 years can be enough to qualify a worker for Social Security benefits.

However, the net amount of a single lifetime work credit has steadily increased. Five years ago it was $1,300. Next year it will almost certainly be above $1,510. Workers will have to make a little extra effort to ensure they are eligible for benefits.

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