The Social Security payroll tax cap has been raised to nearly 9% for 2023, meaning more income will face Social Security taxes next year, but the rise is unlikely to affect the solvency of the funds underpinning the system.
Citing the increase in average wages, the Social Security Administration said the maximum amount of earnings subject to Social Security tax (the maximum taxable amount) will increase to $160,200 from $147,000 starting in January. The ad was part of Release of Cost of Living Adjustment, or COLA, Thursday. The taxable maximum for 2021 was $142,800.
While the increase is steeper than in recent years, the taxable cap is unlikely to affect the overall social security system, experts said.
The taxable cap “will generate more revenue and tax benefits from higher-income families,” said Rob Williams, managing director of financial planning at Charles Schwab. “It will contribute more to the system. Generating more income may help solvency but we won’t know for sure until Social Security trustees release their next report.”
Each year, the Social Security and Medicare Board of Trustees releases a closely watched report on the financial health of the two program trust funds that support benefits for retired, survivors, and disabled beneficiaries. In June, the latest report stated that without any changes in the next 13 years, social security beneficiaries You can expect to see a 20% reduction in their Social Security checks in 2035.
Only people with income thresholds between $147,000 and $160,200 will feel the change in the taxable cap. People who earn more than this maximum — even millions of dollars over this level — will pay the same taxes as someone who earns $160,200, said Eric Bronenkant, head of taxes at Betterment at Work.
“These changes are not designed to move the needle one way or the other,” Broninkant said. “It would require legislative changes to do something in order to change the retirement age or change benefits.”
Roughly 80% to 85% of all wages are below this taxable maximum, according to the Center for Retirement Research at Boston College.
Only 6% of all income earners will be affected by the change, or roughly six to seven million people, said Jim Blankenship, a New Berlin, Illinois-based financial advisor who specializes in Social Security retirement benefits and who also writes for MarketWatch.
There were proponents who called for higher increases in the taxable maximum as a way to help boost Social Security. When campaigning for president for the 2020 election, Bernie Sanders and Buttigieg’s house He proposed raising the salary tax cap.
“We have so much inequality in income and wealth that I think people with higher incomes should pay more,” said Nancy Altman, president of the Social Security Corporation.
There have been proposals to stabilize Social Security, such as raising the retirement age, increasing payroll taxes or reducing benefits, and allowing more legal immigration, but lawmakers have been reluctant to get involved in the main topic of reform. Social Security has long been referred to as the “third barrier” of politics, because it is deadly if you touch it, but lawmakers are not expected to act until trust funds are down.
“What it will take is a Disaster looms Similar to what happened in 1982, Blankenship said.
Allows higher wages for workers under full retirement age
The profit limit For workers who claim social security before full retirement age The Social Security Administration also announced that the maximum earnings for people who reach full retirement age in 2023 will increase to $21,240. There is no income limit for workers who have reached full retirement age or older throughout the year.
“Essentially, if you claim Social Security before your full retirement age but are still earning above a certain threshold ($21,240 in 2023), Social Security will withhold a portion of your benefits and give it back to you later. This is because when you claim early, you get “Most people time retirement and Social Security together,” said Anqi Chen, assistant director of savings research at Boston College’s Center for Retirement Research.
“It just allows someone to earn a little bit more,” said Williams of Schwab. But working in retirement isn’t just about income. It’s a social and activity and some people still want it.”
Some advocates of the law argue that allowing retirees to earn money during retirement raises the question of why Social Security has not gone up to make such work unnecessary.
“It’s another indication that Social Security benefits are too low,” Altman said.