Social Security 2023: Everything To Know About Coming Changes
Social Security is far from a static benefits program.
Although the broad strokes of Social Security remain the same from year to year, many of the financial details change. Perhaps the most important of these changes, and certainly the most well publicized, is the annual cost of living adjustment, or COLA. This increase in payments is made annually to ensure that the payments made to Social Security recipients remain in line with increasing costs due to inflation.
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But other payments and limits that are equally important to the overall Social Security system are also adjusted quite regularly, and this is indeed the case once again for the upcoming year. Here’s a look at the most important Social Security changes that you need to know for 2023.
The Annual Cost-of-Living Adjustment (COLA)
The headline news item regarding Social Security for 2023 is the large cost-of-living adjustment announced in October. The 8.7% boost in payments beginning January is the largest since an 11.2% jump in 1981. Specifically, the average monthly payment for all retired workers will spike from $1,681 in 2022 to $1,827 in 2023.
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This is particularly good news for retirees in 2023, as inflation began tapering off in the second half of 2022. After the peak 9.1% CPI reading in June 2022, inflation has steadily fallen off to 7.1% as of November. If the Fed’s aggressive campaign of interest rate hikes continues to rein in inflation, the large COLA that retirees receive for all of 2023 will more than outweigh the increased costs of goods and services.
It isn’t just retiree benefits that will enjoy the 8.7% increase in 2023, however. All Social Security recipients will benefit. For example, for a widowed mother with two children, the average benefit will jump from $3,238 to $3,520. Elderly widowers and widows who live alone will also see the same 8.7% bump, from $1,567 to $1,704, as will disabled workers. For example, a disabled worker who has a spouse and at least one child will see an increase from $2,407 to $2,616.
One thing to note is that the Social Security Administration doesn’t base the COLA on the CPI number that is most commonly quoted in the financial press. Rather, the SSA uses a derivative of the CPI known as the CPI-W, which is the Consumer Price Index for urban wage earners and clerical workers. The CPI-W for each year’s third quarter is the figure that determines the COLA for the following year.
The Increased Maximum Social Security Benefit
Just as the average monthly Social Security payout will increase in 2023, so too will the maximum benefit. For 2022, the top payout was $4,194; but, in 2023, that will jump to $4,555.
One thing about the “maximum Social Security benefit” is that it’s all but unattainable for most Americans. For starters, you’d have to wait until age 70 to file for benefits, and most retirees file at 67 or even as early as 62. But to get that top amount you’ll also need to earn at or above the Social Security wage base for the full 35 years that the SSA takes into consideration when calculating your benefit.
While that’s certainly possible for those who consistently take home a very high paycheck, in reality, only about 6% of Americans exceed the Social Security wage base in any given year, let alone for 35 years.
The Higher Social Security Wage Base
Unfortunately, part of the way that the SSA funds the higher COLA is through an increase in the taxable wage base. The wage base is the amount of income that is subject to Social Security taxes.
High earners therefore get a break on their taxes by avoiding Social Security taxes above a certain limit that gets adjusted every year. The adjustment is the same as the COLA, meaning these two elements of the program are linked.
For 2022, the Social Security earnings wage base was $147,000; but, for 2023, that jumps all the way to $160,200. This means high earners will have to pay Social Security taxes on an additional $13,200 of their income in 2023.
The Stepped-Up Earnings Limit
If you earn too much income while drawing Social Security, your benefit is temporarily reduced, although you’ll ultimately be made whole. For 2023, the amount you can earn before your benefits are reduced is also increased, to $21,240. If you reach full retirement age in 2023, that limits jumps to $56,520.
Correlation: Medicare Payments
Medicare is technically a different program than Social Security, but both rely on taxes paid by workers and most retirees use the services of both. An important development for Medicare in 2023 is that the monthly premium for part B will actually decrease, from $170.10 to $164.90. This is another important break for seniors in the midst of an inflationary economy.
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This article originally appeared on GOBankingRates.com: Social Security 2023: Everything To Know About Coming Changes
