The Social Security program has remained relatively unchanged over the past decade or so, with only a handful of significant reforms being implemented.
However, whenever inflation is a major topic in the media, so is Social Security. This is because a significant number of facets of the program are linked to variations in the cost of living.
When the Social Security retirement payments were increased by 5.9 per cent in 2022 to account for rising inflation, many people learned this fact for the first time.
After the first half of 2022 has passed, the potential changes that might be implemented into Social Security in 2023 are starting to come into focus.
In 2023, the following significant shifts are on the horizon for both active workers and retiree beneficiaries, and both groups should begin making preparations now.
Significant Revision to Account for Cost of Living
The rise in the Social Security cost-of-living adjustment from 5.9 per cent to 5.9 per cent in 2022 was the largest jump seen since the 7.4 per cent hike in 1982, which was an enormous 40 years ago.
However, the rate of inflation in 2022 has only continued to pick up speed, and it appears almost certain at this point that the cost-of-living adjustment (COLA) for 2023 will be even higher. Based on the way inflation is trending right now, some industry experts forecast that the increase could reach as high as 8.6 per cent.
Do you have concerns that the amount of money you receive from Social Security will decrease during your lifetime?
Although the Consumer Price Index, or CPI, is frequently referred to as “the inflation rate,” the Social Security Administration uses a variant of the CPI known as the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.
This index is specifically designed to account for the cost of living for urban wage earners and clerical workers.
Because the SSA bases the cost-of-living adjustment (COLA) for the subsequent year on the reading of the CPI-W that occurs at the end of the third quarter, this is the number that you should keep an eye on.
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Jumpin Wage Base
The amount of a worker’s earnings that are subject to taxation under the Social Security system is equal to the wage base.
Only the first $147,000 of a worker’s earnings are subject to the OASDI tax of 6.2%, which goes toward funding the various Social Security programs.
This threshold is set for 2022. However, because of the impact that changes in inflation have on it, this number will likely show a significant increase in 2023.
For the year 2021, for instance, the wage base was $142,800; however, due to the high rate of inflation that year, that number ended up being 2.9 per cent higher.
Workers should anticipate yet another increase in 2023, which will translate to an increase in the amount of Social Security taxes paid by those with higher incomes.
Enhancement of the Highest Possible Benefit
The expansion of the wage base may have a positive impact on high earners, even though no one enjoys having their tax burden increased.
Even though a larger portion of their income will be subject to taxation, a larger portion of their earnings will be credited toward the future payment of their Social Security benefit.
Earnings that are eligible for Social Security rise in tandem with an increase in the wage base.
Because the amount you earn throughout your working career is one of the most important factors in determining your ultimate payout — along with the date on which you apply for benefits — an increasing wage base enables you to credit more earnings toward your benefit, which in turn increases the amount of money you receive.
As a consequence of this, the highest possible Social Security benefit, which is currently set at $4,194 for the year 2022, is likely going to go up in 2023 as well.
Increase In The Permitted Earnings
If you begin collecting Social Security benefits before you reach the full retirement age and continue to work while collecting those benefits, there is a possibility that your payments will be reduced temporarily.
On the other hand, the upper limits of how much money you can make and still remain exempt from this benefit reduction are subject to annual adjustments, and you can anticipate another one in the year 2023.
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Workers were exempt from the tax in 2022 if they made less than $19,560 annually, which is equivalent to $1,630 per month.
Workers who earned more than this limit were subject to a reduction in benefits equal to one dollar for every two dollars they earned over this limit.
Those who reached the full retirement age in 2022 were subject to a reduction of one dollar for every three dollars they earned over a separate ceiling of $4,330 per month, which was equivalent to $51,960 per year until they reached the full retirement age.
At that point, no employees will be subject to any further reductions in their benefits.
Take note that these cuts in benefits are only going to be temporary. When a worker reaches the age at which they are eligible for full retirement benefits, their payments begin to be adjusted to reflect the number of benefits that had been withheld up until that point.
