The Social Security system experienced change last year when it was announced that the cost-of-living adjustment would be increased by 8.7%, the largest hike since 1982. For the coming year, it appears as though adjustments will continue to be on the horizon as inflation rises and several other factors look to shape the future of the system. Social Security typically is a large part of individuals retirement plans and any variations to the structure of the system can have noticeable impacts on retirement, especially for those looking to finish working within the next 10 years or so. This post will outline everything that you need to know for Social Security in 2023. Our team closely monitors the Social Security system and is happy to speak about how these changes may affect your personal retirement plan or schedule.
Cost-of-living adjustment for 2023
COLA, otherwise known as the cost-of-living adjustment, experienced a massive increase during 2022 as the country dealt with high levels of inflation. It was assumed that inflation would eventually be curbed and that the adjustment for 2023 would not be as dramatic, but this was not the case. Due to inflation impacts and projects at the end of 2022, it was announced that the COLA will jump from 5.9% to a whopping 8.7% for the present year. The CPI-W, which is the Consumer Price Index for Urban Wage Earners and Clerical Workers, determines what the COLA will be for the next fiscal year at the end of Q3 of the current year. It is important to keep an eye on the CPI-W for 2023 as Q3 approaches as this will determine the increase for 2024. Current projections show that the adjustment is set to decrease back to historically normal rates, somewhere below 3%.
Retirement and retired workers
For retired people who receive Social Security benefits, a COLA increase can help maintain their purchasing power and keep up with the rising costs of goods and services. Without COLA, retired persons would experience a decrease in the value of the benefits provided by Social Security. If inflation rises by 3% in a given year, but the Social Security Administration were to only raise COLA benefits by 1.5%, then retirees would experience a net loss of purchasing power of 1.5%. It is important to note that COLA adjustments are not always enough to fully offset inflation, thus other aspects of an individual’s retirement plan must be set up to make up for this discrepancy. The specific impact of COLA on retirees varies based on a variety of factors, such as their income level, health status, and geographic location.
Income
Income influences Social Security in many ways and in the coming years there will be continued adjustments to the system based around individuals yearly earnings. There are limits to earnings subject to SS taxes, which in 2022 was capped at $147,000, but is experiencing a rather large increase for 2023. The new earnings subject to SS taxes threshold jumped $13,200 over the past year, making income up to $160,200 taxable for 2023. This steep hike reflects increasing wages across the country and accounts for variable impacts of inflation. This is by far the largest increase Americans have seen in the past 10 years and is a trend that could be continuing, as the jump has increased from $0 from 2015-2016, to $4,800 from 2019-2020, to now a record increase for 2022-2023. This could lead to less take-home pay in the future years if the trend continues; however, continuing to raise the limit may be key to fixing Social Security’s insolvency problem.
In addition to taxable minimums that have been in fluctuation, there have also been changes to earnings limits for workers younger than retirement age and those reaching retirement age in 2023 who are claiming Social Security early. Individuals that are younger than retirement age in 2023 need to make under $21,240 during the fiscal year in order to be exempt from reduction of benefits, this is an increase from the $19,560 limit in 2022. For workers reaching retirement age in 2023, the limit increases from $51,960 in 2022 to $56,520 for this year. These increases are larger than those seen in the past several years and are reflective of increased wages for workers due to factors such as higher costs of living.
Full Retirement Age
The age at which people are considered fully retired has been pushed back in recent years. When Social Security was first implemented, the full retirement age (FRA) was 65. The full retirement age for anyone born after 1960 is now 67. For 2023, this has a small, but possibly meaningful, effect for individuals looking to collect their standard benefit rather than a reduced one. Individuals that were born in 1956 had to wait until they turned 66 and 4 months old in order to receive their standard benefit, while people born in 1957 must wait until they turn 66 and 6 months. This two month pushback will continue for the next several years and even though this change may be small, it can have an impact on retirees that are low on cash reserves early in retirement.
Trends in the past decade
There have been several notable trends within the Social Security system that are important to be aware of as they may be a glimpse of what shapes the future of the program.
Beneficiaries
An increase in the number of beneficiaries has been noteworthy and steady in the last several years. The number of individuals collecting Social Security has grown by a staggering 9 million people between 2010-2020. This increase is discussed when talking about the viability of the program into perpetuity.
Retirement age
An increase in the retirement age has been in the works for a long time, but has been felt most in recent years as the age to collect standard benefits approaches 67 in 2027. There is consistent debate on whether this age marker could increase or decrease in the years following the Baby Boomer generation.
Digitalization
A new shift towards digital services has taken place in the last decade that has allowed individuals to apply for benefits online as well as access their Social Security statements and other information through the Social Security Administration’s website. The SSA will look to continue to make changes to their processes in order to help improve the ease at which beneficiaries can apply and receive their money.
Re-evaluations & future-proofing
The program continues to struggle through financial challenges that have called into question the future of the system itself. These issues with financial viability arise from changing American demographics including an increase in retirees and a decrease in new workers paying into the system. Politicians continue to have debates on the future of the program.
Impact of public opinion
The Social Security system has been a hot topic of political and social discourse for some time. People who are currently paying into the system are being told that there is a possibility of the government sunseting the program in the future if no serious reform takes place. A way in which public discourse can influence the future of the system is via the fact that changes to the Social Security system typically require congressional action. Thus, public opinion can influence politicians’ decisions to support or oppose proposed changes to the program. If there is strong public opposition to reducing Social Security benefits, lawmakers may be less likely to support such a proposal. Additionally, public opinion can have an impact on the funding of the system. Since Social Security is funded through payroll tax, if there is public opposition to increasing payroll taxes to fund Social Security, lawmakers may be less likely to support such a proposal. The influence that citizens have on Congress will be put to the test in the coming years and it will help shape what changes are made to the Social Security system as a result.
Inflation trends
Inflation has caused major impacts to the standard benefit received over the last several years and will likely continue to shape the COLA for years to come. Although the CPI-W is an accurate measure in assessing the adjustments needed in order to afford individuals the same buying power as in years past, some experts believe that benefits have fallen short of inflation growth since the start of the Covid-19 pandemic in 2020. The Senior Citizens League, one of the largest non-partisan senior groups in the country, estimates that benefits have fallen short by $1,054 from 2020-2022. According to the group, the impact is seen most heavily in 2021 and 2022 and the likelihood of full recovery is uncertain. Even if inflation were to be curbed, then the COLA would likely not change year over year, which would still leave people in a deficit. Ensuring proper income streams during retirement at a time like this can be very important.
How to counter the inflation impact
The impact that inflation has had on Social Security in recent years has been noticeable and drastic. No one knows exactly what the future holds for the economy and the program, so it is important to think ahead in order to adequately prepare for the effects of inflation in the future. The following are three ways in which individuals can try to counter the effects inflation has on their Social Security money in retirement:
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Diversify investment portfolio
Diversification of investment portfolios is a common method used to protect assets in many different economic scenarios. Including a mix of asset classes, such as stocks, bonds, and real estate can help to mitigate the impact of inflation. This is due to the fact that stocks and real estate are considered inflation-sensitive investments, meaning they tend to perform well during periods of inflation.
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Invest in inflation-protected assets
Similarly to diversifying a personal portfolio, investments made in a few key asset categories can help ensure that an individual is shielding themselves from the negative effects that inflation brings upon the economy. Gold is a frequently purchased asset for this purpose due to its value as an alternate currency to government-issued money. Other commodities such as oil, natural gas, and electricity can also be used to hedge against inflation. Treasury inflation-protected securities (TIPS) are government offered securities that adjust payments according to inflation, but these should only be purchased when inflation is certainly on the rise, as the value of fixed payments will decrease for an individual if inflation falls.
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Delay taking Social Security benefits
Delaying taking Social Security benefits until age 70 can help to maximize benefits and mitigate the impact of inflation. By delaying benefits, individuals can increase their monthly benefit payments and the annual COLA adjustments they receive, resulting in a higher level of inflation-adjusted income in the future. Additionally, delaying benefits means that an individual will be receiving benefits for fewer years in total, which can help to mitigate the impact of inflation on their overall Social Security income.
What Your Financial Advisor Can Do To Help
Working with a wealth manager or financial advisor to cover the topic of Social Security can be crucial to properly ensuring the success of a retirement plan.
The Social Security Administration publicly releases all changes made to the system every year, but it is important to work with someone who understands how these changes can affect a personal portfolio or plan and what to adjust in order to still be ready for retirement. The timing of claiming benefits is crucial for several reasons and must be determined by a variety of factors such as life expectancy, income needs, and spousal benefits. The intertwining of a well structured retirement plan and an understanding of how Social Security will fit into the plan can be one of the key success factors for making sure money lasts while in one’s golden years.
Our advisors are here to help decide which combination of factors can help contribute to a happy and successful retirement for yourself and your loved ones.
Schedule a free, non-obligatory, 15 minute phone consultation with a member of our team via the Calendly link below:
By Ben Fuchs, CFP®, CPWA®
Investment advisory services offered through Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser. Ben Fuchs authors this commentary, which may include information and statistical data obtained from and/or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Foundations had no involvement in the content and did not make any revisions to such content. All such third-party information and statistical data contained herein is subject to change without notice and may not reflect the view or opinions of Foundations. Nothing herein constitutes legal, tax or investment advice or any recommendation that any security, portfolio of securities, or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. All investments involve risk and past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083. Rates and Guarantees provided by insurance products and annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC. This is not endorsed or affiliated with the Social Security Administration or any U.S. government agency.
