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: Social Security’s ‘taxable maximum’ inches higher—but will it make a dent in the trust fund?


Social Security’s payroll tax cap was raised 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 trusts underpinning the system.

Citing the increase in average wages, the Social Security Administration said the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $160,200 from $147,000 starting in January. The announcement was part of the release of the cost-of-living adjustment, or COLA, on Thursday. The taxable maximum for 2021 was $142,800.

While the increase is sharper than in recent years, it’s unlikely the higher taxable maximum will affect the overall Social Security system, experts said.

The higher taxable maximum “will generate more revenue and tax benefits from higher earning households,” said Rob Williams, managing director of financial planning at Charles Schwab. “It will contribute more to the system. Generating more income may help the solvency but we won’t know for sure until the Social Security trustees release their next report.”

The Social Security and Medicare Board of Trustees issues a closely watched report every year on the financial health of the program’s two trust funds that support benefits to retired, survivor and disabled beneficiaries. In June, the most recent report said that without any changes in the next 13 years, Social Security beneficiaries can expect to see a 20% cut to their Social Security checks in 2035.

The change in the taxable maximum will only be felt by the people with income thresholds between $147,000 and $160,200. Those people who earn more than that maximum—even millions of dollars above that level—will pay the same taxes as someone making $160,200, said Eric Bronnenkant, head of tax at Betterment at Work. 

“These changes are not designed to move the needle one way or the other,” Bronnenkant said. “It would require legislative changes to do something on the order of changing the retirement age or changing benefits.” 

Roughly 80% to 85% of all wages are below this taxable maximum, according to the Center for Retirement Research at Boston College. 

And only 6% of all earners will be impacted by the change, or roughly six to seven million people, said Jim Blankenship, a financial adviser located in New Berlin, Ill., specializing in Social Security retirement benefits who also writes for MarketWatch. 

There’s been proponents who have called for even higher hikes in the taxable maximum as a way to help shore up Social Security. When campaigning for president for the 2020 election, both Bernie Sanders and Pete Buttigieg proposed hiking the payroll-tax cap. 

Read: Social Security is at a crossroads this election season—and older voters have enormous power

“We’ve had so much income and wealth inequality that I do think the higher income people should pay more,” said Nancy Altman, president of Social Security Works. 

There have been proposals to stabilize Social Security, such as raising the retirement age, increasing payroll taxes or cutting benefits, and allowing more legal immigration, but legislators have been reluctant to engage the subject of major reform. Social Security has long been referred to as the “third rail” of politics, because it’s deadly if you touch it, but lawmakers aren’t expected to act until the trust funds run lower.

“What it’s going to take is a looming disaster similar to what happened in 1982,” Blankenship said. 

Read: This could be the perfect time for Social Security reform—except for one thing

Higher wages allowed for workers under the full retirement age

The earnings limit for workers who claim Social Security before their full retirement age will increase to $21,240 and the earnings limit for people reaching their full retirement age in 2023 will increase to $56,520, the Social Security Administration also announced. There is no limit on earnings for workers who are full retirement age or older for the entire year.

“Basically, if you claim Social Security before your full retirement age but are still earning above a certain limit ($21,240 in 2023) then Social Security will withhold part of your benefit and give it back to you later. This is because when you claim early, you receive an actuarially lower benefit. Most people time their retirement and Social Security claiming together,” said Anqi Chen, assistant director of savings research at the Center for Retirement Research at Boston College.

“This just allows someone to earn a little more,” Schwab’s Williams said. “But working in retirement is not just about income. It’s social and an activity and some people still want that.”

Some advocates argue that allowing retirees to earn money during retirement raises the question of why Social Security isn’t higher to make such work unnecessary.

“It’s another signal that the Social Security benefits are too low,” Altman said.

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