The Social Security Administration recently announced several adjustments to the program for 2023 that will affect retirees and workers alike. With inflation at multi-decade highs, these revisions may have a more immediate impact than usual on retiree finances. Still, it is wise for workers to understand how changes like these can affect their longer-term finances.
Cost of Living Adjustments (COLA)
For 2023, benefits paid by Social Security will increase by 8.7%, the most significant annual increase since 1981 and a stark rise compared to those seen over the last decade. Over the 48 years since COLAs began in 1975, an 8.7% increase ranks as the fourth largest, with the top three concentrated between 1979 – 1981.
Looking at the average of all retired workers, expected monthly benefits will increase by $146 from $1,681 to $1,827. The average monthly benefits for an aged couple will increase by $238 from $2,734 to $2,972.
The Social Security Administration bases COLAs on an inflation metric called CPI-W, the short version of a more academic title, the Consumer Price Index for Urban Wage Earners and Clerical Workers, published by the Bureau of Labor Statistics. By comparison, the Federal Reserve measures its inflation-seeking success by another measure called PCE, or Personal Consumption Expenditure index, published by the Bureau of Economic Analysis. We talk about some of the differences here. These are just two of the many inflation measurements assembled by various government agencies, few of which accurately reflect the changing prices so many of us read about and experience daily.
Maximum Taxable Earnings
The changes affect workers too. The maximum taxable earnings upon which Social Security deductions are based will increase by $13,200 for 2023, or an 9.0% increase to $160,200. Any dollar earned beyond that point will forgo the 7.65% employee tax rate or the 15.3% self-employed tax rate. Such a large increase goes hand-in-hand with the benefits COLA increases above. Expect to see these limits raised in coming years, increasing contributions to a dwindling Social Security Trust Fund. Also, starting January 1, 2023, individuals earning more than $200,000 ($250,000 for married couples filing jointly), will pay an additional 0.9% in Medicare taxes.
Full Retirement age
For beneficiaries who become newly eligible in 2023, or those born in 1961, the full retirement age will remain unchanged at 67 years. 2022 was the final stage in a 22-year plan to increase the full retirement age from 65 to 67 gradually. Raising the retirement age further is one of many proposed steps to help shore up the Social Security Trust Fund, though nothing is currently under consideration.