More than 50 million Americans depend on Social Security for at least part of their retirement income. This makes it an essential part of the country’s overall retirement infrastructure. Yet despite its importance to so many current and potential retirees, the program is struggling. According to the latest report from its trustees, Social Security Trust Funds are expected to run out of money by 2035, forcing deep benefit cuts, tax hikes, or a combination of the two.
With this harsh reality in mind, it’s important to know what to expect from Social Security in 2023 — just a dozen years before that expected judgment day. What happens next year and the next few years will determine whether this projection for 2035 ends up being too ambitious, too conservative, or about right. Here are four changes you can expect for Social Security in 2023.
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1. Benefits go up a lot
Current beneficiaries should receive a 8.7% increase in their payments in 2023, thanks to the programme’s annual inflation adjustment. In October 2022, the typical retiree was receiving $1,676.53 per month in benefits. Add 8.7% to this amount and the average monthly benefit will be approximately $1,822.39 starting in January 2023.
As nice as it sounds, remember that Social Security payment increases are designed to reflect the inflation people have already experienced over the past year. Therefore, beneficiaries should not expect their lifestyle to improve as a result of this annual increase.
2. Beneficiaries may see a slightly larger boost due to Medicare Part B
Most people who receive both Social Security and Medicare have their Medicare Part B premiums deducted directly from their Social Security benefits. The standard monthly premium for Medicare Part B actually drops to $164.90 in 2023 from $170.10 in 2022. That extra $5.20 a month might not seem like much, but every little bit counts.
This has the potential to be particularly beneficial in the future. There is an “exemption” clause regarding the interaction between Medicare Part B premiums and Social Security. If your Medicare Part B premiums are deducted from your Social Security check, any increase in your base Medicare Part B premiums cannot be greater than the increase in your Social Security benefit. Note that the disclaimer does not apply if you pay an income-related supplement to your Medicare Part B premium.
3. Social Security payroll tax will be levied on higher income levels
Social security benefits are largely financed by the taxes workers pay on their wages. In 2023, people will pay Social Security taxes on the first $160,200 of their salary, up from $147,000 in 2022. That $13,200 represents the largest dollar increase in earnings subject to Social Security taxes in the world. history of the program. For high-income individuals affected by this limit, it is a tax increase of $1,636.80 (half paid directly by the taxpayer, half paid by the employer on behalf of the taxpayer).
This increase may help Social Security in the short term, as it means the possibility of more income entering the system to pay for current benefits. This is less of a benefit for long-term Social Security, however, since people’s benefits are based on their covered wages during their working years. As a result, people who pay higher taxes now will be entitled to higher benefits later when they collect themselves.
4. Social Security will likely score another year closer to its doomsday
As mentioned above, according to the latest report from Social Security trustees, the trust funds for the program are on track to empty by 2035. There are only 12 years left until 2023.
That said, Social Security projections assume an inflation rate of 4.54% for 2022, 2.33% for 2023, and 2.4% from there. As evidenced by the massive increase beneficiaries expect for 2023, inflation has been higher than expected in 2022. In the official Social Security projection, inflation is actually good for program trust funds, since higher taxes are levied now, but the highest benefits are paid later.
That might make sense if that inflation is paired with a generally healthy economy and higher wages. In an inflationary environment marked by economic stagnation — or stagflation – the impact may actually be detrimental to the health of social security trust funds. In effect, the benefits increase with inflation, but the program’s tax revenue increases with the increase in wages. If wages do not keep up with this inflation due to slow or negative economic growth, this could bring the date for the emptying of trust funds closer.
Treat Social Security the way it’s designed to be treated, and you’ll probably end up okay.
Despite the very important role that Social Security plays in the retirement plans of so many people, it’s important to remember that it was never intended to be your sole source of retirement income. On average, it covers around 40% of people’s pre-retirement earnings, a higher percentage for low-income workers and a lower percentage for high-income workers.
In this perspective, it was already important to have a plan in place to cover the part of your retirement needs that Social Security will not cover. If you already have such a plan in place, it’s pretty straightforward to make minor adjustments to it based on what you expect to happen in 2023.
If you don’t, let the changes to Social Security in 2023 be a wake-up call to put your plan in place now. The sooner you do this, the easier it will be to make the adjustments you need to prepare for a financially comfortable retirement.
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Chuck Saletta has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.