November 24, 2022
  • November 24, 2022

7 changes to Social Security in 2023

By on October 15, 2022 0

Social Security is our nation’s most successful retirement program. In 2020, it was responsible for lifting nearly 22.5 million people out of poverty, and according to a recent survey by national pollster Gallup, it’s key to helping just under 90% of retirees join the two ends during their golden years.

Social Security is also a program that undergoes changes on a regular basis. During the second week of each October, the Social Security Administration releases a fact sheet detailing changes that will impact recipients and workers contributing to the program over the coming year. This week marked that crucial announcement.

Here are the seven biggest changes to Social Security in 2023.

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1. Beneficiaries will get their biggest “raise” in 41 years

Without a doubt, the most significant change announced this week is the Cost of Living Adjustment (COLA) for 2023. Social Security’s COLA is the mechanism designed to adjust benefits based on the rate of inflation. in force, as determined by the consumer price index. for salaried and urban employees (CPI-W).

In January, nearly 66 million Social Security recipients will receive a whopping 8.7% “raise.” You’ll notice that “increase” is in quotes to indicate that this benefit increase is to keep up with inflation and is not the same as a pay raise you would receive from an employer, which could potentially help you outpace current inflation. assess.

In percentage terms, this 8.7% COLA is the largest year-over-year increase in 41 years and the fourth largest since the CPI-W became the program’s inflationary link in 1975. In terms of nominal dollars, this will be the most important. increase in history. It is estimated that the average retired worker will see their monthly benefit increase by $146 in 2023 to around $1,827.

But before breaking the champagne, consider that a significant portion of that COLA is being swallowed up by historically high inflation. Plus, the purchasing power of Social Security dollars has shrunk 40% since 2000. In other words, Social Security’s cost-of-living adjustment isn’t all it is. supposed to be.

2. The highest paid workers will have to open their wallets a little more

It’s not just recipients who are affected by annual Social Security changes. High-income workers will be in line for higher taxable income in 2023.

This year, the 12.4% Social Security payroll tax on labor income (wages and salaries, but not investment income) was applicable between $0.01 and $147,000. Self-employed workers pay the entire 12.4% payroll tax (up to $147,000), while workers employed by a company share this tax with their employer. The payroll tax provides Social Security with the lion’s share of its revenue.

The maximum taxable earnings cap (the $147,000 figure) adjusts along with the national average wage index in most years. With workers enjoying significant wage-pricing power, the maximum taxable earnings cap will increase from $147,000 in 2022 to $160,200 in 2023. For the 6% of workers who report more than $147,000 in earned income per year, this change could result in as much as $1,636.80 in additional payroll taxes next year.

3. The rich get richer thanks to a beefier maximum payout

However, it’s not all bad news about being a high earner. Next year, the maximum monthly payout at full retirement age – the age at which eligible beneficiaries are entitled to 100% of their pension benefits – will skyrocket. After an increase from $197/month in 2022 to $3,345, lifetime high earners will see the maximum benefit at full retirement age increase from $282/month to $3,627. For those of you keeping score at home, that’s over $43,500 a year.

But to receive this maximum monthly payment from Social Security, three criteria must be met. A worker should:

  • Wait until full retirement age before receiving benefits.
  • Work at least 35 years since the Social Security Administration considers a worker’s 35 highest earning years, adjusted for inflation, when calculating their monthly retirement benefit.
  • Meet or exceed the maximum taxable earnings limit in the 35 years considered by the Social Security Administration.

Only about 2% of workers end up qualifying for the maximum monthly payment at full retirement age.

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Image source: Getty Images.

4. Withholding thresholds for early filers are increasing

Social Security is a program that encourages patience. Pensioners who begin to receive their benefits before reaching full retirement age (eg between 62 and 66) are subject to a number of penalties. For example, monthly payments are permanently reduced for first-time filers.

Additionally, beneficiaries may be exposed to the retirement income test, which allows the Social Security Administration to withhold all or part of the beneficiary’s payment if they earn above predefined income thresholds.

For example, early filers who will not reach full retirement age this year may have $1 withheld in benefits for every $2 of earned income over $19,560 ($1,630/month). For early filers who will reach full retirement age in 2022, $1 of benefits may be withheld for every $3 of earned income above $51,960 ($4,330/month).

In 2023, these income thresholds increase, meaning that early filers can pocket more earned income without some or all of their benefits being withheld. First-time filers who will not reach full retirement age can earn $21,240 ($1,770/month) next year with no deductions in effect. Meanwhile, first filers reaching full retirement age can earn up to $56,520 ($4,710/month) before any deductions. begin.

The retirement income test is no longer applicable once a beneficiary reaches full retirement age.

5. Disability income thresholds are climbing

The second week of October is also, historically, good news for disabled workers and their families who depend on a monthly payment from the program. In September, about 8.95 million people received disability benefits, including 7.7 million disabled workers.

In 2022, non-blind disabled workers were allowed to report $1,350 of earned income without having their benefits cut off. But when the curtain opens in 2023, those same people will be able to generate $1,470/month in earned income before their benefits end. That’s up to $1,440 in additional annual income.

The pay threshold also increases significantly for blind disabled workers. This year, the monthly earnings ceiling before the end of benefits is $2,260/month. In 2023, it will increase to $2,460/month.

6. The bar for qualifying for Social Security benefits is rising

One thing you may not realize about Social Security is that you are not automatically entitled to a benefit just because you are a US citizen. To receive a retirement benefit, as well as survivor and disability coverage, you will need to accumulate work credits. A total of 40 lifetime work credits are required to receive Social Security benefits, of which a maximum of four can be earned each year.

While that might sound like a lot of work (pardon the pun), it really isn’t. In 2022, a work credit was granted for each $1,510 of income earned. Thus, a worker who generates $6,040 in earned income will receive the maximum of four lifetime credits this year.

This relatively low bar for qualifying for benefits will rise a little over the next year. In 2023, it will take $1,640 in earnings to equal one-fourth coverage, according to the Social Security Fact Sheet. To earn a full complement of four Lifetime Work Credits, you will need to earn $6,560 next year.

Table of United States Old Age, Survivors, and Disability Insurance Trust Fund income from the taxation of benefit receipts.

Taxing benefits brought in more than $40 billion in Social Security revenue in 2021. U.S. Trust Fund for Old Age, Survivors, and Disability Income from Taxation of Benefit Receipts given by Y-Charts.

7. Retirees risk seeing their tax burden increase

Social Security’s latest big change isn’t something you’ll find on the recently released fact sheet, but it’s relevant to a growing number of retirees nonetheless.

In 1983, with Social Security’s asset reserves running low, Congress passed, and then-President Ronald Reagan signed into law the last major overhaul of Social Security. The 1983 Social Security Amendments gradually increased payroll tax and full retirement age, as well as introducing benefit taxation. Up to 50% of Social Security earnings became taxable when a worker’s modified adjusted gross income (MAGI) plus half benefits exceeded $25,000 (or $32,000 for a couple filing jointly).

In 1993, the Clinton administration added a second level of taxation. This new level allows up to 85% of Social Security benefits to be taxed at the federal rate if the MAGI formula plus half of the benefits exceeds $34,000 for a single filer or $44,000 for a couple filing jointly.

Here’s the catch: These income thresholds have never been adjusted for inflation. As cost of living adjustments have naturally increased monthly payments over time, more and more retirees are exposed to federal taxation on their benefits. With a historic COLA of 8.7% heading into 2023, it makes sense to expect the tax liability of many Social Security recipients to rise.