In 2022, the Social Security cost-of-living adjustment rose 5.9%, the most since 1982 (7.4%). Inflation in 2022 has accelerated, and it appears probable that the COLA for 2023 will be higher. Based on inflationary tendencies, some analysts forecast a hike of 8.6%.
The Social Security Administration utilises the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The SSA utilises the third-quarter CPI-W to determine the next year's COLA, so watch that number.
Social Security taxable wages are based on the wage basis. The 6.2% OASDI tax, which funds Social Security benefits, applies to a worker's first $147,000 in 2022. This value is connected to inflation and will likely rise in 2023.
2021's wage base was $142,800, but inflation pushed it up 2.9%. Higher earners might expect another Social Security tax hike in 2023.
The growth in the wage base offers a silver lining for high incomes. While more of their income is taxed, more is counted to their Social Security pension. Social Security earnings rise with the wage base.
As your career earnings are one of the most important variables in calculating your final payout, a growing wage base allows you to credit more earnings toward your benefit. The maximum Social Security payout, $4,194 in 2022, may rise in 2023.
If you file for Social Security benefits early and continue to work, your benefits may be cut. In 2023, the limitations on how much you can earn and yet avoid a benefit cut will be adjusted again.
For 2022, exempt workers made less than $19,560 per year or $1,630 per month. Benefits were reduced by $1 for every $2 beyond the limit. Those reaching full retirement age in 2022 risked a $1-every-$3 decrease on earnings exceeding $51,960 per year, or $4,330 per month. All workers are then exempt from benefit cuts.
The main question facing Social Security is what it will look like by the mid-2030s. The SSA expects the Trust Fund to be depleted then. Due to payroll taxes on current workers, Social Security will continue to pay benefits, albeit at 80% of current levels.
Current workers and retirees should monitor legislative developments over the coming decade.