While Social Security has been around for decades, the program’s specific rules aren’t necessarily set in stone. Every year, Social Security tends to undergo changes related to inflation. And 2023 is no exception.
Once 2023 rolls around, Social Security beneficiaries will be eligible for a generous 8.7% cost of living adjustment (COLA). High levels of inflation have allowed seniors to look forward to their biggest increase in many years.
Anything else that will change in 2023? The wage ceiling is going up.
Higher earners do not pay Social Security taxes on all of their income. Instead, a cap is introduced each year that determines what wages are taxable.
This year, the wage cap is set at $147,000, so earnings above that threshold are not taxed for Social Security purposes. But next year that limit rises to $160,200, so higher earners will lose much more of their income.
Finally, Social Security income test limits are rising. These limits apply to workers who receive Social Security but also earn money from a job before they reach full retirement age (FRA).
But while Social Security is clearly going through some big changes in the new year, one important rule remains the same. And it’s important to know if you’re considering applying for benefits.
Submitting early will continue to cost you
Inflation puts pressure on consumers, and if you’ve struggled to pay your bills, you may be tempted to claim Social Security in 2023, even if you’re not ready to retire or have reached FRA. If you do this, you risk having part of your benefits withheld if your wages exceed the means test limits.
But other than that, claiming Social Security before FRA has long led to a permanent reduction in benefits. And that won’t change in 2023.
If you turn 62 in 2023, that means your FRA for Social Security purposes is 67. It also means that signing up for benefits in 2023 will reduce them by 30% – for life. That’s a huge hit to include, especially if you don’t have a lot of money in an IRA or 401(k) plan to tap.
And just to be clear, it’s not like your monthly benefit will increase to the full amount once you reach FRA in that scenario. Instead, you’re stuck with a lower monthly benefit for life unless you manage to undo your first Social Security application within a year and pay back all the money you received in benefits.
Be careful about claiming benefits early
It may seem like a good idea to file for Social Security as soon as possible, regardless of whether your decision involves inflation or not. But you should know that the penalties for claiming benefits early won’t change. If you file for Social Security early, you should expect to receive a lower monthly benefit for life. Period of time.
Plus, if you claim Social Security early but are still working, you could lose in more ways than one. You can reduce your monthly payments by filing before FRA and eventually a portion of your benefit will be withheld due to excess earnings. That, frankly, may not be worth it. So if you’re still working and haven’t reached FRA, it may pay to look at other ways to increase your income without having to file for Social Security.