For the last 10 years or so, Social Security has been a fairly static program, with few major changes. But when inflation makes big news, so too does Social Security. This is because so many aspects of the program are tied to changes in the cost of living. Many learned that for the first time in 2022, when Social Security retirement payments were increased by 5.9% to account for rising inflation.
Social Security: How Much Does a Person on Social Security Make?
Learn: 7 Surprisingly Easy Ways To Reach Your Retirement Goals
With half of 2022 in the books, the potential adjustments that might hit Social Security in 2023 are coming into focus. Here are some of the big changes that both current workers and retiree beneficiaries should start preparing for in 2023.
Big Cost-of-Living Adjustment
The 5.9% increase in the Social Security cost-of-living adjustment in 2022 was the largest jump since the 7.4% hike in 1982, a whopping 40 years ago. But inflation in 2022 has only continued to accelerate, and it seems all but inevitable at this point that the COLA for 2023 will be even larger. Some analysts predict the bump could be as high as 8.6%, based on current inflationary trends.
Although the Consumer Price Index, or CPI, is often quoted as “the inflation rate,” the Social Security Administration actually uses a variant known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The SSA uses the CPI-W reading at the end of the third quarter to determine the following year’s COLA, so that’s the number to keep your eye on.
Take Our Poll: Do You Think Student Loan Debt Should Be Forgiven?
Jump in Wage Base
The wage base is the amount of a worker’s earnings that are taxable for Social Security purposes. The 6.2% OASDI tax, which funds various Social Security programs, applies only to the first $147,000 of a worker’s earnings for 2022. But this number is also tied to changes in inflation and is likely to go up significantly in 2023.
The wage base in 2021, for example, was $142,800, but the high rate of inflation in 2021 pushed that number 2.9% higher. Workers should expect another bump up in 2023, meaning higher earners should expect to pay more in Social Security taxes.
Increase in Maximum Benefit
Although no one wants to pay more taxes, the increase in the wage base has a silver lining for high earners. While more of their income will be taxed, more of their earnings also will be credited to their future Social Security benefit. As the wage base increases, so too do qualifying Social Security earnings.
As the amount you earn in your working career is one of the most important factors in determining your ultimate payout — along with when you file for benefits — an increasing wage base allows you to credit more earnings toward your benefit. As a result, the maximum possible Social Security benefit, which sits at $4,194 for 2022, is also likely to increase in 2023.
Rise in Earnings Limit
If you file for Social Security benefits before full retirement age and continue to earn income, your benefits may be temporarily reduced. However, the limits of how much you can earn and still avoid this benefit reduction are also subject to annual adjustment, and you can expect another one in 2023.
For 2022, workers who earned less than $19,560 per year, or $1,630 per month, were exempt. Workers exceeding this limit faced a reduction in benefits of $1 for every $2 they earned above this limit. Those reaching full retirement age in 2022 faced a reduction of $1 for every $3 they earned above a separate limit of $51,960 per year, or $4,330 per month, until they hit full retirement age. At that point, all workers become exempt from any benefits reductions.
Note that these benefit reductions are only temporary. Once a worker reaches full retirement age, they receive adjusted payments reflecting the payment of previously withheld benefits.
Changes Further Afield
Although all of these potential changes for 2023 are notable, probably the biggest question about Social Security is what it will look like by the mid-2030s. At that point, the SSA anticipates that the Social Security Trust Fund will be exhausted. While Social Security will continue to pay benefits, thanks to payroll taxes on current workers, estimates see benefit levels dropping to 80% of current levels.
Although some type of legislative solution is likely to crop up over the next decade, both current workers and retirees should keep an eye on ongoing developments.
More From GOBankingRates
How Much is Prince Harry Worth?
Get Ready for Retirement Now With Expert Tips for Every Stage of Life
Should You Still Buy a Home in Today’s Market?
10 Things to Do Now If Your Credit Score Is Under 700
This article originally appeared on GOBankingRates.com: Social Security Changes That May Be Coming for 2023
Source: Read Full Article