Although Social Security has been around for decades, the program's specific rules aren't necessarily set in stone. Each year, Social Security tends to go undergo changes related to inflation. And 2023 is no exception.
Once 2023 arrives, Social Security beneficiaries will be eligible for a generous 8.7% cost-of-living adjustment (COLA). High levels of inflation have made it so seniors can look forward to their largest raise in many years.
Another thing that's changing in 2023? The wage cap is increasing.
Higher earners don't pay Social Security taxes on all of their income. Rather, each year, a cap is put into place that dictates what level of wages are taxable.
This year, the wage cap is set at $147,000, so earnings above that threshold aren't taxed for Social Security purposes. But next year, that cap is rising to $160,200, so higher earners will lose a lot more of their income.
Finally, the Social Security earnings-test limits are rising. These limits apply to workers who are collecting Social Security but are also earning money from a job before having reached full retirement age (FRA).
But while Social Security is clearly undergoing some big changes in the new year, one key rule is staying the same. And it's important one to know about if you're thinking of filing for benefits.
Filing early will continue to cost you
Inflation has been putting a strain on consumers, and if you've been struggling to pay your bills, you may be inclined to claim Social Security in 2023, even if you're not ready to retire or haven't reached FRA. Doing so will mean taking the risk of having some of your benefits withheld if your wages exceed the earnings-test limits.
But that aside, claiming Social Security ahead of FRA has long resulted in a permanent reduction in benefits. And that's not changing in 2023.
If you're turning 62 in 2023, it means your FRA for Social Security purposes is 67. It also means that signing up for benefits in 2023 will reduce them by 30% — for life. That's a massive hit to lock in, especially if you don't have a ton of money in an IRA or 401(k) plan to tap.
And to be clear, it's not like your monthly benefit will be bumped up to its full amount once you reach FRA in that scenario. Rather, you'll be stuck with a lower monthly benefit for life unless you manage to undo your initial Social Security filing within a year and repay all of the money you received in benefits.
Be careful when claiming benefits early
Filing for Social Security as soon as you're able to might seem like a good idea — regardless of whether your decision relates to inflation or not. But you should know that the penalties for claiming benefits early aren't changing. If you file for Social Security early, you should assume you'll end up with a lower monthly benefit for life. Period.
Furthermore, if you're claiming Social Security early but still working, you could lose out in more than one way. You could slash your monthly payments by filing ahead of FRA and then end up having a chunk of your benefits withheld due to earnings that are too high. That, frankly, may not be worth it. So if you're still working and haven't reached FRA, it could pay to look at other ways to boost your income that don't involve filing for Social Security.
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