Biggest Changes to Social Security for 2023

The highly anticipated increase in Social Security benefits for 2023 has been capturing all the headlines, and for good reason. The massive 8.7% cost-of-living-adjustment (COLA) is the biggest in decades, brought about by the two-year surge in inflation. That’s a significant and welcomed increase that will boost a $2,000 per month benefit to as high as $2,174.

But the big jump in inflation has led to several other changes to Social Security for 2023 that will impact retirees and those planning for retirement.

No Change in Medicare Part B Premium

In past years, a COLA increase in Social Security benefits has been offset by an increase in Medicare part B premiums, which had the effect of dampening the higher payout. This time, Medicare part B premiums are being reduced from $170.10 per month to $164.90 in 2023.

Earnings Limit Increased

Generally, if you start collecting benefits before your full retirement age (FRA) while continuing to work, you have to give back $1 in benefits for every $2 in earnings above the earnings limit. For 2022, the earnings limit is $19,560 ($1,630 a month). But in 2023, you can earn up to $21,240 ($1,770 a month) before the $1 benefit reduction is triggered.

However, if you attain FRA (while still working) in 2023, the earnings limit is $56,520, up from $51,960. For every $3 of earnings generated prior to your FRA, $1 will be withheld. Once you reach FRA, the benefit reduction stops the following month. The FRA is 67 for anyone born after 1960.

Increase in Maximum Taxable Wage Cap

If you’re still working, you will pay more in Social Security taxes in 2023. The maximum taxable wage cap, which limits the amount of earnings subject to the FICA tax (6.2% of your earnings), will increase from $147,000 in 2022 to $160,200 in 2023. For someone earning the maximum taxable wage, their FICA taxes will increase by $818.

Increase in Earnings Needed to Earn Credits

To qualify for Social Security benefits, everyone must accumulate 40 work credits—up to four per year for at least ten years. In 2022, the earnings needed to qualify for one credit was $1,510. In 2023, you will need to earn $1,640 for one credit.

Increase in Maximum Social Security Benefit

For high earners retiring at FRA, the maximum Social Security benefit also increases in 2023, jumping $282 a month to $3,627 from $3,345 in 2022. That translates to more than $43,500 in benefits per year.

To qualify for the maximum benefits, you must wait to claim Social Security until your FRA after working for at least 35 years. In determining your benefit amount, the Social Security Administration looks at your 35 highest-earning years. You must have hit or surpassed the maximum taxable earnings cap in each of those years.

Beware the Stealth Torpedo Tax

While it’s not an intentional change to Social Security benefits in 2023, recipients should be aware of a possible increase in the taxation of their benefits. That big 8.7% COLA increase could cause many recipients’ modified adjusted gross income (MAGI) to exceed the income thresholds, triggering a Social Security tax.

The taxation of benefits was introduced in 1984 to boost Social Security asset reserves. Under the tax law, up to 50% of your Social Security benefits become taxable if your MAGI, including one-half of your benefits, exceeds $25,000 ($32,000 for joint filers). Ten years later, another taxation tier was added, exposing your MAGI plus one-half of benefits to an 85% tax rate if it exceeds $34,000 ($44,000 for joint filers).

While there has been no change in the tax law, the income thresholds have never been adjusted for inflation. So, as cost-of-living adjustments have increased benefits in the last several decades, an increasing number of recipients have been wading into the deep end of the income thresholds and are being torpedoed by the stealth Social Security tax.

Assessing the Impact of Social Security Changes on Your Situation

Although each year brings some changes to Social Security, these changes are significant enough to warrant an assessment of how they might impact your retirement. While some will have a positive impact, others could have adverse consequences. It would be essential to work with your financial advisor to consider these changes in light of your situation and determine if you need to make any adjustments to your retirement plan