Social Security is an important benefits program. Both those currently receiving a pension and current employees need to know how it works.
Specifically, there will be some very important changes in 2023 that you should be aware of and prepare for. Here they are.
1. The pension benefits will be higher
Social Security beneficiaries will get a lot more money on their checks starting in 2023. That’s because of a major cost-of-living (COLA) adjustment.
COLAs take place in most years. Its purpose is that seniors do not lose their purchasing power. Of course, since the price of goods and services rises over time, benefits have to go up or retirees would see their checks buy much less. The formula used to calculate COLAs is based on changes in a consumer price index, which showed a large increase in inflation when it was last measured. As a result, pensioners will receive an 8.7% surcharge next year.
This is the largest annual increase in benefits in 40 years. While that may seem like good news, seniors should remember that this increase is only to help them deal with rising prices. So you may not be able to buy more even though your checks get bigger because the things you buy will also be more expensive.
2. Seniors can work more without losing part of their benefits
If you’re claiming Social Security benefits before your designated full retirement age (FRA), be careful if you want to work while collecting those checks. If you earn too much, you will temporarily miss out on part of your benefit.
The good news is that the threshold at which benefits are taken will increase in 2023:
- If you do not reach your full retirement age throughout the year, you can earn up to $21,240 or $1,770 per month before benefits are impacted. Above this amount, you lose $1 in benefits for every $2 in extra pay. This is an increase from the $19,560 limit in 2022.
- If you will reach FRA sometime during the yearyou can earn up to $56,520, or $4,710 per month before benefits are impacted, and lose $1 in earnings for every $3 over that amount in 2023. This is up from $51,960 in 2022.
The fact that you can earn a little extra income without worrying about forfeiting benefits can be a relief to many seniors who hope to rely on both a paycheck and Social Security for support. However, this does not affect those who have already reached full retirement age, as you can work as much as you like if that is your situation.
3. You have to earn more to get work credit
To qualify for Social Security in the first place, you need 40 work credits (unless you claim on a spouse’s work history). You can earn a total of four Work Points per year, but you must earn a certain amount to do so.
By 2022, you could earn one work credit for every $1,510 you earned (up to a maximum of four per year). But in 2023, you won’t earn a work credit until you earn $1,640. This is a significant increase and could mean that more lower-income or part-time workers will not be able to maximize their credit this year.
4. Current high earners may be hit by higher tax bills
Finally, today’s higher-income workers could also be affected by a major change.
Social Security taxes are levied only on income up to a certain threshold, called the wage base limit. In 2022, this limit was $147,000. However, in 2023 it will go up to $160,200. This means workers will face Social Security taxes on as much as $13,200 in additional income that was untaxed in 2022.
All of these changes will have a major impact on current and future retirees, and you should be sure to take them into account if they affect your wallet.