The biggest Social Security change for 2023 is the major cost-of-living adjustment (COLA) increase. At least, that is the one most people are talking about. But there are other important changes set to go into effect next year that will impact both workers and retirees. To help you prepare, here are the Social Security changes for 2023 and how they could change your financial plan.
2023 Social Security COLA
In response to high inflation, Social Security benefits will jump by 8.7% next year. This is the largest COLA since 1981.
According to the Social Security Administration, here’s what the COLA increase looks like in dollar terms:
Benefits will increase on average by more than $140 per month.
For individuals, the estimated average monthly Social Security benefits payable in January 2023 will rise from $1,681 (2022) to $1,827.
For couples with both spouses receiving benefits, the estimated average monthly benefit will increase from $2,734 to $2,972, a boost of $238.
For a worker retiring at full retirement age, the maximum monthly Social Security benefit will jump from $3,345 to $3,627.
What does this mean?
If you’re collecting Social Security, you’ll see a bigger monthly paycheck. However, how far those extra dollars go depends on how much the costs of your personal expenses have gone up due to inflation.
2023 Social Security Earnings Limit
If you claim Social Security before your full retirement age (FRA), which is age 67 for people born after 1960, and continue to work, some of your benefit will be withheld above a certain threshold. This Social Security earnings limit will also increase in 2023.
$1 is withheld for every $2 earned above $21,240 in 2023, up from $19,560 in 2022.
In the year you reach FRA, $1 is withheld for every $3 earned above the much higher threshold of $56,520 in 2023, up from $51,960 in 2022.
Once you have reached your FRA or older, you may keep all your benefits, no matter how much you earn.
Some retirees choose to work either for extra income or simply for something to do. It’s important to not let it become a negative. The good news is that the higher earnings limit gives those Social Security recipients a little more flexibility.
2023 Social Security Tax
In 2023, workers can expect more of their income to be subjected to Social Security taxes. The first $160,200 of earnings will be taxed for Social Security at a rate of 7.65%. This is a $13,200 increase from $147,000 in 2022. Any earnings above $160,200 will not be subject to additional Social Security taxation.
Do these changes impact when you should file for Social Security?
Social Security is a top source of income for most retirees. So, it’s crucial to choose when to claim your benefit carefully.
The earliest you can claim is age 62. But, if you take Social Security early, your benefit is permanently reduced for each month taken before your full retirement age. Every year you delay Social Security from age 62 up to age 70 entitles you to a higher benefit of up to 8% per year. A benefit at age 70 will be 76-77% higher than the payout if you start at age 62.
So, it doesn’t make sense to claim early just to take advantage of the 2023 COLA. Especially, when you can receive a higher benefit by delaying until age 70. And, even with the higher earnings limit, you may not want to take Social Security while still working as a portion of your benefit is withheld.
Ultimately, the best time for you to file depends on several factors, ranging from your health, the size of your retirement savings, what other income sources you have, and your marital status.
When it comes to choosing when to file for Social Security, you may want to work with a financial adviser to calculate a break-even analysis. This will determine the age when the amount you receive if you claim early equals the amount you would have received if you claimed later.
The goal isn’t to just maximize your Social Security benefit but use it in a way that helps maximize your total retirement income.
Learn more about claiming strategies by downloading our GUIDE TO SOCIAL SECURITY BENEFITS. After reading, you'll know:
- When are you eligible to start collecting benefits?
- Should you collect early or wait for full retirement age?
- Does working affect benefits?
- How do spousal and survivor benefits work?
- What is a "do-over"?
- How is Social Security taxed?
And much more!
