Every year, the Social Security Administration (SSA) updates the changes to Social Security that will come into place in the following year. This year, the changes made by the SSA include making alterations to the Cost of Living Adjustment (COLA), social security threshold adjustments, and changes to maximum earnings that are subject to Social Security Tax. It's important to stay aware of changes to social security so that you can plan effectively for retirement.
This article will guide you through the key changes to Social Security in 2023.
What are the Changes to Social Security in 2023?
If you’re looking to uncover the latest Social Security changes 2023 and the impact that they will have on your pocket in the coming year, here's what you need to know:
1. Increase to the COLA of 8.7%
COLA, or the Cost of Living Adjustment, is Social Security's way to ensure that benefits match the rate of inflation. An increase of 8.7% is higher than the 2022 amount of 5.9% and is the highest COLA adjustment in over 40 years. This significantly impacts the amount of Social Security you will receive, meaning that for every $1,000 of Social Security received in 2022, the same benefits in 2023 would bring $1,087.
2. Increase in Social Security Threshold
In 2023, the amount you can earn before paying Social Security tax goes up from $147,000 to $160,200. So, in 2023, you'll pay Social Security tax of up to 12.4% on earnings up to $160,200. If you earn above $160,200, you will not pay tax on this amount.
3. Earnings required to qualify for Social Security Benefits
Your eligibility for receiving Social Security benefits are determined by the number of Social Security credits you earn over your working career. You can earn 4 credits a year, and you need a total of 40 credits to be eligible for retirement benefits when you reach the required age. In 2022, you earned 1 Social Security credit for each $1,510 earned. In 2023, you need to make $1,640 to earn a credit.
4. No offset to Medicare Premiums
2023 saw a reduction of Medicare Part B premiums from $170.10 to $164.90. 2022 saw a considerable rise in Medicare Part B premiums, effectively wiping out the 5.9% COLA increase. Yet, this isn’t the case in 2023, and the reduction in Part B premiums allows for all of the 8.9% COLA adjustment to go straight into your pocket.
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5. Adjustment to Social Security Earnings
If you receive retirement benefits but aren’t yet of full retirement age (FRA) of 67, then the SSA is entitled to withhold an amount of your retirement benefits. In 2022, the SSA would withhold $1 for every $2 earned above $19,560. In 2023, this limit has increased to $21,240. If you are of retirement age and still earning a salary, SSA will withhold $1 of every $3 earned above $56,520, a significant rise from $51,960 in 2022.
Will Social Security Run Out?
There is a lot of speculation that Social Security will run out of funds at some point between 2033 and 2035. If this happens, there will be less Social Security paid to eligible recipients. However, the situation may not be as severe as it sounds.
Social Security primarily gets its money from taxes taken out of working people's paychecks. Even if the Social Security Trust Fund runs out, the government can still use money from taxing current workers to make Social Security payments. If this happens, it's likely that benefits would be reduced. Although the exact amount is unclear, any decrease to benefits would affect retirement plans for beneficiaries and retirees.
To counter this, the Social Security Administration will have to take action, with several possible routes the organization can take. For example, the SSA could increase payroll tax rates or raise the cap on taxable earnings. The Trust Fund could also be invested to gain returns that could be used for retirement distributions. Alternatively, the Social Security changes retirement age could be increased to 70. Currently, only 5% of men and 7% of women wait until the age of 70 to get their social security.
It's likely that ultimately, the SSA will take action that will incorporate all of the above items in some way to ensure the long-term sustainability of social security benefits. These issues mean that for now, retirement planning is more critical than ever.
How to Prepare Yourself for Retirement
If you find yourself nearing retirement age, there are several factors for you to consider to prepare yourself financially. It’s important to note that there is no one-size-fits-all solution, so while we cannot suggest the best option, we have outlined the key factors you may wish to consider.
- Early retirement or full retirement age: This choice will depend on your personal circumstances and your need to access cash. Early retirement will get you access to money sooner, but less than you’d be entitled to at full retirement age. To learn more about the impact of retirement age on your social security benefits, read our full guide.
- Options to save more: As you near retirement, saving up as much money as possible is essential. You may want to implement a budget and maximize your 401(k) to optimize your savings.
- Eliminate your debt: Try to pay off all your debts before retirement. Debts such as credit card debts and personal loans often come with high interest rates, and reducing this debt burden reduces your interest expense, freeing up extra funds for retirement. Read more on: 5 Steps for Overcoming Credit Card Debt.
- Get professional advice: As mentioned, retirement planning is a very personal process, as everyone has different financial circumstances. Consulting a retirement planning professional ensures that the advice received will best suit your needs.
How Do You Calculate Your Break-Even Age for Social Security?
Your "break-even age" for Social Security is the point at which the total value of the extra benefits you receive by delaying your retirement equals the total value of the reduced benefits you receive if you choose to retire early. Calculating your break-even age can be pretty complicated, but the SSA provides a handy Social Security calculator to help do this for you.
For example, let’s say that you take early retirement at 62, which would result in you receiving $750 in monthly benefits. Let’s compare this to reaching full retirement age, which would result in you receiving $1,090 a month in benefits. With early retirement, you’ll get $9,000 a year ($750 a month) for the first five years or $45,000 for the five-year period. Yet, if you wait until full retirement age, you’ll receive $13,080 a year or $4,080 a year more. Therefore, if you divide $45,000 by $4,080, you’ll discover that from full retirement age, you’ll have the same retirement earnings after 11.1 years when you are 78.1 years of age. After this point, you’ll earn more than if you had taken early retirement.
Considering your "break-even age" for Social Security is important because it helps you make informed decisions regarding when to start claiming your benefits.
Even though there have been several Social Security changes over the years, we’ve outlined the fundamental changes to 2023 Social Security benefits in this guide. Remember that there isn’t a one-size-fits-all solution when planning for your live post-employment. Ultimately, your best bet is to engage a retirement planning professional to ensure that you get the best possible advice.