For over eight decades, Social Security has served as a crucial financial safety net for older Americans, helping them maintain financial stability when they are no longer working. According to a study by the Center on Budget and Policy Priorities, each year, Social Security lifts approximately 22.7 million people out of poverty, including 16.5 million seniors aged 65 and older.
Social Security undergoes updates annually, and with the turn of the year, six significant changes are now in effect.
A Noticeable Increase in Social Security Payments
Each year, Social Security recipients eagerly await the announcement of the cost-of-living adjustment (COLA). The COLA is designed to counteract the impact of inflation on retirees’ purchasing power. For example, if the cost of goods and services commonly used by retirees increases by any percentage, Social Security benefits are adjusted similarly to prevent a decrease in purchasing power.
This year, Social Security benefits will see a 2.5% increase due to the COLA. Although this is the smallest increase in the past four years, it remains above the average increase of approximately 2.3% observed over the past 15 years. In terms of actual dollars, the average retired worker will see their monthly check increase by $49 to $1,976. Similarly, disability and survivor benefits are set to increase by $38 per month to $1,580 and $1,551, respectively.
Despite these increases, the higher costs of housing and medical care, along with rising Medicare Part B premiums, might continue to strain the real value of these Social Security payments.
Increased Taxes for High-Income Earners
The new year also brings changes that affect not just current beneficiaries but also high-income workers. Social Security is funded primarily through a 12.4% payroll tax on earned income. Starting today, all earned income up to $176,100 is subject to this tax, up from $168,600 last year.
The good news for most workers is that approximately 94% earn below this cap and won’t see a change. However, the top 6% of earners will face a higher tax liability, potentially increasing by up to $930 for the self-employed and $465 for those employed by others.
Higher Maximum Benefits for Retirees
High earners can expect a more substantial Social Security check in retirement this year. The maximum monthly benefit at full retirement age has increased to $4,018 from $3,822 last year. Full retirement age is when a person can start collecting 100% of their entitled benefit.
Achieving this maximum benefit requires meeting specific criteria, including delaying benefits until reaching full retirement age, having at least 35 years of high earnings, and having earnings at or above the maximum taxable cap for all those years.
Changes to Early Retirement Benefit Reductions
2023 also brings adjustments for those who choose to claim Social Security benefits before reaching full retirement age. The retirement earnings test, which can reduce early filers’ benefits if they have significant income, now allows early filers to earn more before reductions kick in. Specifically, those not reaching full retirement age can earn up to $23,400 this year without penalty, up from $22,320 last year.
For those reaching full retirement age in 2023, the threshold before reductions apply has increased to $62,160 from $59,520.
Updated Income Caps for Disabled Workers
Disabled workers also see changes in 2023. Non-blind disabled workers can now earn up to $1,620 per month without affecting their benefits, up from $1,550 last year. For blind workers, the limit has increased to $2,700 per month from $2,590.
Stricter Requirements to Qualify for Benefits
Finally, it’s slightly more challenging to qualify for Social Security benefits this year. While benefits are based on lifetime work credits, with up to four credits earnable per year, the amount of earnings required to receive one work credit has risen to $1,810, up from $1,730 last year. To earn the maximum four credits, one now needs $7,240 in annual earnings.
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Passionate about analyzing economic markets, Alice M. Carter joined THE NORTHERN FORUM with a mission: to make financial concepts accessible to everyone. With over 10 years of experience in economic journalism, she specializes in global economic trends and US financial policies. She firmly believes that a better understanding of the economy is the key to a more informed future.
