Six changes to the US pension system that came into effect in 2023

The social security system is not static. Many of its working parts are designed to change over time. About six changes in the social security system, which came into force on January 1, reports Fool.

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For more than 80 years, Social Security has lived up to its name and provided a degree of financial security for US retirees. The program lifted nearly 2020 million people out of poverty in 22,5, including 16,1 million adults aged 65 and over, according to the Center for Budget and Policy Priorities.

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Here are the latest changes in the social security system.

1. Social Security checks receive historically high adjustment

The most anticipated change is the historically large cost-of-living adjustment (COLA). It comes into effect in January payments, which are sent to almost 66 million beneficiaries.

The Social Security COLA is the way the program takes into account the inflation that its beneficiaries have struggled with over the past year. Ideally, benefits should increase in proportion to the rate of inflation so that the recipients (mostly the elderly) do not lose purchasing power. In 2023, beneficiaries will see an 8,7% increase in their Social Security check.

In percentage terms, the cost-of-living adjustment of 8,7% is the highest in 41 years. In terms of annual nominal dollar growth, this will be the largest in the program's history. The average retiree is expected to receive a $146 increase this month.

Just as important for retirees, 2023 will be for only the second time this century that Medicare Part B premiums — the part of Medicare that covers outpatient services — will drop from the previous year. Since most Medicare members have their Part B premium automatically deducted from their Social Security check, this will result in more real money. In other words, 8,7% COLA for 2023 could actually exceed the rate of inflation and result in more real money for many retirees.

2. Maximum monthly payment at full retirement age increases

If you're on a high pension, the new year will bring with it the possibility of a much bigger monthly benefit check.

Last year, the maximum monthly payment a retiree could receive at full retirement age—the age when eligible beneficiaries are eligible for 100% of the payment—was $3345. But due to rapidly rising inflation rates, the maximum monthly benefit at full retirement age will rise by $282 to $3627 in 2023. Approximately 2% of retirees will receive this benefit check each month.

To reach this maximum monthly benefit, three conditions must be met:

• Retirees must wait until full retirement age (usually between 66 and 67) to qualify for benefits.
• They need at least 35 years of service because the Social Security Administration (SSA) uses 35 years of service with the highest inflation-adjusted income of a worker when calculating their monthly benefit at full retirement age.
• They will need to reach the maximum taxable income limit for each of the 35 years used by SSA in calculating monthly benefits.

3. Highly paid workers may face a larger tax bill

If you are a highly paid worker, you may face a larger tax bill this year.

Approximately 90% of the more than $1 trillion in income collected by Social Security each year comes from a 12,4% payroll tax on earned income (we're talking about wages, not investment income). If you work for someone else or for a company, you and your employer split this tax liability equally. Meanwhile, if you are self-employed, the burden of paying this 12,4% tax falls entirely on you.

In 2022, all wages between $0,01 and $147 were subject to payroll tax. But thanks to a historically significant increase in the national median wage index, the maximum taxable income ceiling has risen to $000 from $160 today. For the self-employed, this $200 year-on-year increase in maximum taxable income could mean payroll taxes of up to $147 this year.

4. Eligibility for Social Security benefits has become more difficult

Social Security is not a right you get simply because you are a US citizen. Rather, you earn your pension by working. To qualify for Retirement or Disability and Survivor Benefit, you need to accumulate 40 seniority credits.

While this may seem like a daunting task, it's actually easier than you probably think. Workers can earn a maximum of four loans per year, which means they can reach the retirement benefit threshold in as little as 10 years.

More importantly, the earned income threshold to qualify for work loans is set quite low. Earned income of $6040 in 2022 would bring the employee the full amount of loans for the year.

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Starting today, you'll have to work a little harder to qualify for Social Security coverage. Instead of $1510 in earned income, you will need $1640 in wages to qualify for one seniority work credit. To get a maximum of four credits this year, you need to earn $6560 dollars.

5. Disability income thresholds

Social Security disability income thresholds represent another big change that has officially gone into effect.

Social security also plays a key role in supporting the long-term disabled. As of November, 8,88 million people with disabilities who work received an average of $1364 in Social Security benefits each month.

To continue receiving Social Security disability benefits each month, workers can only bring home a certain amount of earnings. For non-blind, disabled workers, benefits were discontinued in 2022 at earned incomes above $1350 per month. For the blind and disabled, that monthly threshold was set at $2260 last year.

Non-blind disabled workers will be able to earn $1470 a month without ending benefits that year. Meanwhile, for blind disabled workers, the earnings threshold will increase by $200 per month to $2460.

6. Withholding thresholds for early applicants are rising

The sixth and final Social Security change now in effect could affect retirees who began receiving Social Security checks before they reached full retirement age.

Social Security encourages patience on the part of eligible beneficiaries and tends to punish those who apply early in various ways. One such way is to check retirement earnings. The retirement income test allows SSA to withhold some or all of early applicants' Social Security benefits if they receive too much earned income.

There are two very different levels of assessment of retirement earnings. The first category refers to early applicants who have not reached full retirement age in 2023. Last year, SSA could withhold $1 of benefits for every $2 of income earned over $19, or $560 per month. Now that income threshold is being raised to $1630, or $21 per month.

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The second category is for early applicants who will reach full retirement age at some point this year. In 2022, SSA withheld $1 in benefits for every $3 of income earned over $51 ($960 per month) in the months leading up to full retirement age. Starting today, that income threshold is raised to $4330, or $56 per month.

It's important to note here that these conditions on retirement earnings no longer apply after you reach full retirement age, regardless of when you started receiving benefits. After age 66-67, depending on your full retirement age, SSA will not be able to withhold a cent of what you are owed, no matter how much you earn.

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