For more than 80 years, Social Security has stayed true to its name and provided a measure of financial security for our nation’s retirees. According to the Center on Budget and Policy Priorities, the program lifted nearly 22.5 million people out of poverty in 2020, including 16.1 million adults age 65 and older.
But Social Security is not static. Its many functional parts are designed to change over time. To welcome in the new year, here are six Social Security changes taking effect today.
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1. Social Security exams are getting a historic boost
The most anticipated change is the historically large cost of living adjustment (COLA), which will be reflected in January’s payouts to nearly 66 million beneficiaries.
Social Security’s COLA is a way for the program to account for the inflation its beneficiaries have struggled with over the past year. Ideally, the benefits should increase in line with the rate of inflation so that the recipients (usually senior citizens) do not lose purchasing power. In 2023, the beneficiary’s Social Security check will increase by 8.7%.
On a percentage basis, an 8.7% cost of living adjustment is the highest in 41 years. In terms of year-over-year nominal dollar growth, it will be the largest in the program’s history. The average retiree is expected to receive a $146 increase in their Social Security check this month.
Equally important for retirees, in 2023, for only the second time this century, Medicare Part B premiums — the portion of Medicare that covers outpatient benefits — will decrease from the year before. Because most Medicare members automatically have their Part B premium deducted from their Social Security check, this will result in a real cash boost to their wallets. In other words, the 8.7% COLA for 2023 could actually beat the rate of inflation and result in real money improvement for many retirees.
2. The maximum monthly payment at full retirement age increases
If you’re a lifetime high-earning retiree, the new year brings with it the opportunity to receive a much heftier monthly benefit check.
Last year, the maximum monthly payout a retired worker could receive at full retirement age — the age at which eligible beneficiaries are entitled to 100% of their payout — was $3,345. But thanks to a rapidly rising inflation rate, the maximum monthly benefit at full retirement age will increase by $282 to $3,627 in 2023. About 2% of retirees bring home this top-notch benefit check every month.
In order to achieve this maximum monthly benefit, three criteria must be met:
- A retiree must wait until their full retirement age (usually 66 to 67) to claim benefits.
- They must have worked for at least 35 years because the Social Security Administration (SSA) uses the 35 years of a worker’s highest earnings, adjusted for inflation, when calculating their monthly pension at full retirement age.
- You must meet the maximum taxable income cap in each of the 35 years used by the SSA in calculating monthly benefits.
3. High earners may face a higher tax burden
But for the wealthy in 2023, not everything is a cakewalk. If you’re a high-earning worker, you could expect a higher tax bill this year.
About 90% of the more than $1 trillion in revenue that Social Security collects each year comes from the 12.4% payroll tax on earned income (we’re talking wages, but not capital gains). If you work for someone else or a company, you and your employer split that tax liability down the middle. On the other hand, if you are self-employed, the burden of this 12.4% tax is entirely yours.
In 2022, all wages and salaries between $0.01 and $147,000 were subject to payroll tax. But thanks to a historically large rise in the National Average Wage Index, today’s maximum taxable income cap rises to $160,200 from $147,000. For self-employed workers, that $13,200 annual increase in the maximum taxable income cap could mean they will have to pay up to $1,636.80 in additional payroll taxes this year.
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4. Qualifying for Social Security benefits just got a little more difficult
Despite what you may have heard or said, Social Security isn’t an entitlement you get just because you’re a US citizen. Rather, you earn your benefit through work. To qualify for an old-age pension or a disability and survivor’s pension, you must earn 40 lifetime work points.
While this may sound like a daunting task, it’s actually easier than you probably think. Workers can earn a maximum of four credits per year, meaning they can reach the quality threshold for retirement benefits in just 10 years.
More importantly, the earned income threshold to qualify for lifetime credits is set fairly low. Last year a work loan was received for $1,510 in earned income. Therefore, $6,040 in earned income in 2022 would have offset a worker’s full credit allocation for the year.
Starting today, you’ll have to work a little harder to qualify for Social Security. Instead of $1,510 in labor income, you need $1,640 in wages or salaries to get lifetime labor credit. To earn a maximum of four Labor points this year, you must earn $6,560.
5. Income limits for disabled people are changing
Social Security income limits for the disabled are another major change that officially goes into effect today.
When most people think of Social Security, they rightly think of the more than 48 million retirees and the 2.7 million spouses and children of those retirees who receive a monthly pension. But social security also plays a key role in supporting the long-term disabled. In November, 8.88 million disabled workers received a monthly Social Security check averaging $1,364.
To continue receiving a Social Security disability benefit each month, workers can only bring home so much earned income. For non-blind disabled workers, benefits would end in 2022 for earned income over $1,350 per month. For blind disabled workers, that monthly threshold was set at $2,260 last year.
After we turn the page to 2023, non-blind disabled workers can earn $1,470 a month without their benefits ceasing. Meanwhile, the income limit for blind disabled workers will increase by $200 per month to $2,460.
6. Withholding tax thresholds for early applicants are increasing
The sixth and final Social Security amendment, taking effect today, may affect retired workers who began receiving a Social Security check before they reached full retirement age.
Social Security encourages patience for eligible beneficiaries and tends to penalize early filers in a variety of ways. One such option is the retirement income test. The retirement income test allows the SSA to withhold some or all of an early applicant’s Social Security benefit if they earn too much work income.
There are two very different levels of the retirement income test. The first category belongs to early claimants who will not reach full retirement age in 2023. Last year, the SSA could withhold benefits at a rate of $1 for every $2 of earned income above $19,560, or $1,630 per month. Starting today, that income threshold will increase to $21,240, or $1,770 per month.
The second category is for early adopters who will reach full retirement age sometime this year. In 2022, the SSA would withhold $1 in benefits for every $3 of earnings above $51,960 ($4,330 per month) in the months leading up to full retirement age. As of today, that income threshold increases to $56,520, or $4,710 per month.
It is important to note that once you reach full retirement age, the pension income test no longer applies, regardless of when you started drawing pensions. After age 66-67, depending on your full retirement age, the SSA cannot withhold a penny from what is due to you, regardless of how much you earn.