A Massive Social Security Benefits Increase?

Big Increase for Social Security Benefits for 2023 and Other Changes

by Don Drake, Connelly Law Offices, Ltd.

Up to an 11% increase expected

We are more than halfway through the year, and with 2023 rapidly approaching, it's time once again to begin looking at upcoming changes in Social Security. "Obviously, Social Security plays a major role in the financial well-being of millions of retired and disabled Americans," said certified elder law Attorney RJ Connelly III. "In fact, a current Gallup poll found that 89% of current Social Security beneficiaries rely on these benefits, to some extent, to cover their monthly expenses."

Because of this dependence, it's important that those receiving Social Security benefits pay close attention to the changes that occur annually. "Social Security is a dynamic program, meaning that it changes from year to year," stated Attorney Connelly. "The changes that occur are much more than just the percentage increase in benefits. Often, these changes affect the future of the program which may end up surprising people as they reach retirement age. For instance, 2023 will mark the first time in seven years that the full retirement age will remain unchanged."

Before we get into more of the significant changes for 2023, let's look at the one that most Americans receiving benefits are interested in, the projected cost of living increase (COLA) for the upcoming year.

COLA for 2023

"It's no surprise that inflation is running wild and given that, beneficiaries could be looking at a COLA of around 10%," Attorney Connelly pointed out. "This would be the second consecutive year that such a huge increase will occur."

The Senior Citizens League has stated that the COLA, as it stands now, would be 10.5%, a $175.10 increase to the average monthly retirement benefit of $1,668. "The amount is still in flux since the Social Security Administration calculates the annual adjustment by taking an average of the third-quarter data from 2023 and comparing it with the third quarter from 2022," said Attorney Connelly.

"If the inflation numbers begin to slow down, the actual increase could be 9.8%...if it continues to run high, the increase for beneficiaries could be as much as 11.4%." ---The Senior Citizens League

If the inflation numbers begin to slow down, the actual increase could be 9.8%, according to The Senior Citizens League. Conversely, if it continues to run high, the increase for beneficiaries could be as much as 11.4%. But before we begin popping the champagne corks in celebration of this increase, we also need to remember why it is so high as prices are rising at their fastest rate in decades. For example:

  • The price of gasoline increased 59.9% in the 12 months ending in June compared to the 48.7% annual increase for the same period last year.

  • Food prices are now predicted to increase between 7.5 and 8.5 percent, food-away-from-home prices are predicted to increase between 6.0 and 7.0 percent, and food-at-home prices are predicted to increase between 8.5 and 9.5 percent.

  • The average residential electricity price is projected to increase another 4.3% in 2022.

  • Half of U.S. households heat their homes with natural gas, and they will pay 30% more on average this winter, while homes warmed with electricity will pay 6% more, according to the Energy Information Administration's "Winter Fuels Outlook." It will cost $746 on average to heat homes with natural gas this winter.

"In the July 21st edition of the Providence Journal, reporter Alex Kuffner wrote that 'the majority of Rhode Island homes and businesses are expected to see a 50% increase in their monthly electric bills starting October 1', and the same holds true for others here in southern New England" stated Attorney Connelly. "Given that, the raise for beneficiaries may be eaten up by the increased spending for utilities and other products. So, it's very possible that the COLA may not cover the increased across-the-board annual costs for retirees."

This is not news that beneficiaries want to hear, but it's the reality of where we are today as a nation. There are also some other changes in the system that will affect Americans who pay into Social Security. Let's look at these changes.

High Earners Will Pay More

Those workers who have a high income can expect to pay more next year into the social security program. "Most of the money that funds social security comes from a 12.4% payroll tax on earned income," stated Attorney Connelly. "That cost is shared between the employee and the employer, with each paying 6.2%."

This year, all earned income up to $147,000 is subject to this payroll tax. Anyone earning above that is exempt. However, since the earnings cap is attached to the National Average Wage Index, the percentage increase is expected to go up which will most likely result in an increase in the current $147,000 cap.

How the Social Security Administration spends your money

SSDI Recipients Can Earn More

In 2022, over nine million people receive benefits under Social Security's Disability Insurance. "In addition to the historically high increase in the COLA, it appears there will also be an increase in the amount of money those on SSDI can earn before it affects their benefits," said Attorney Connelly.

Currently, non-blind disabled workers can earn up to $1,350 a month, and blind disabled beneficiaries can earn up to $2,260 monthly before their benefits are affected. Because of the high inflation, it is expected that these SSDI income thresholds will rise in 2023.

Increase in Maximum Benefits

In 2022, the maximum amount a person can collect as a Social Security benefit is $3,345 a month. "That amount is up $197 a month from 2021," said Attorney Connelly. "With the inflation running as high as it is and wages rising, it's expected that there will be a substantial increase in the maximum amount collectible in 2023." However, only a very few retirees ever reach the maximum payout. To do so, the retired person would need to meet three criteria. They are:

  1. They must wait until the full retirement age to make a claim.

  2. They must have worked for a minimum of 35 years. This is because a worker's 35 highest-earning, inflation-adjusted years are used to calculate the benefit.

  3. They must have reached or surpassed the maximum taxable earnings cap for all 35 years. For 2022, that would be at least $147,000 annually.

Always know the numbers

Withholding Thresholds Will Rise for Early Retirees

"One of the dirty little secrets of the Social Security system is that retirees are penalized for taking their payout before reaching the full retirement age," Attorney Connelly points out. "One of the penalties is a retirement earnings test, which allows the system to withhold some or all of a beneficiaries payout, depending upon the individual's earned income."

According to the Motley Fool Website, "Retired workers who took their payout before reaching FRA, and who won't reach FRA in 2022, can have $1 in benefits withheld for every $2 in earned income above $19,560 ($1,630/month) this year. For early filers who will reach FRA at some point in 2022, the SSA can withhold $1 in benefits for every $3 in earned income above $51,960 ($4,330/month)."

The website also states that because of high inflation and wage growth, these income thresholds are expected to jump in 2023, so early filers should be able to earn more without being penalized. And, once a person reaches full retirement age, this is no longer applicable.

The COLAs have not kept up with overall inflation

The Qualifying Bar Rises

Attorney Connelly states that lifetime work credits needed to qualify for Social Security will be harder to earn. "Qualifying for benefits requires an American worker to earn a total of 40 work credits. Each year, a person can earn a maximum of four credits, and this is based on income."

For instance, this year, every $1,510 in earned income equals a single work credit. So, if a person earned $6,040 this year or more, they would get four credits. When you look at this amount, even a part-time worker can earn enough to qualify for benefits after ten years of work. This year, the amount needed to earn one work credit is expected to rise, with the exact amount not yet known.

Good News and Bad News

"The changes I just discussed are important to know and the COLA increase appears to be some good news in this inflationary time, however, through the years, the COLAs did not keep up with the actual cost of living," said Attorney Connelly. "In fact, a recent report from the Senior Citizens League states that the buying power of Social Security benefits has diminished by some 40% since the year 2000, meaning that the annual COLAs just cannot keep pace with rising costs."

Then there's this, by 2035, the monies available to pay for Social Security beneficiaries are expected to run out. According to the Committee for a Responsible Federal Budget, if COLAs are just 8.8% in 2023 and only 3% in 2024, the money will run out two years sooner, in 2033. Plus, there are fewer workers today paying into the system, so earlier projections of collectible money to fund the program will need to be revised downward.

"If the Social Security Administration runs out of money, the benefits won't stop entirely," said Attorney Connelly. "But reports indicate that they could be slashed by at least 20%, down to 80% of what they currently pay. That's not what Americans were promised and worked their entire lives for. Suppose this happens and nine out of ten Americans are still relying heavily on Social Security to cover their monthly expenses. In that case, we could be looking at an entirely different country with seniors working far longer and, in some cases, being unable to retire at all. As a professional fiduciary, I feel it's imperative that we start educating people on proper investments and retirement planning earlier to prepare appropriately for a future without a Social Security system as we know it today."

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