Here’s Why More Social Security Taxes in 2023 Shouldn’t Scare You
The Social Security Administration collected $980.6 billion in payroll taxes in 2021, and while the 2022 data isn’t in yet, that number is likely to be even higher. This trend looks likely to continue in 2023, as Social Security’s maximum taxable income is set to rise again next year.
The thought of the government taxing even more income may not be a pleasant one, but for most people, it’s not a huge deal. Here’s why.
How the government uses Social Security payroll taxes
Social Security payroll taxes are the single biggest source of funding for the program. Right now, the government assesses a 12.4% Social Security tax on your income, split equally between employee and employer. This means your employer pays 6.2% of it, and you pay the other 6.2%.
This money helps fund the Social Security benefits of eligible seniors right now. And when you sign up for benefits, your checks will be funded in part by the taxes the generations after you pay.
But what many don’t realize is that the government doesn’t charge Social Security taxes on all income. In 2022, it only taxes a person’s first $147,000 in earnings. In 2023, this will rise to the first $160,200 in earnings.
What this means for you
If you earn less than $147,000, you’re not going to notice any change when the government starts collecting more Social Security taxes in 2023. You’re already paying Social Security taxes on all of your income. The only people who will notice a change are those with incomes exceeding the $147,000 ceiling for 2022.
These individuals will have to pay Social Security taxes on a larger percentage of their incomes, which will result in less money for their own bank accounts. But it’s not all bad news.
The Social Security Administration looks at how much money you’ve paid in Social Security payroll taxes over the years when calculating the size of your benefit. Those who have paid more throughout their careers receive larger benefits in retirement.
In 2022, the largest possible benefit a worker can earn while claiming at their full retirement age (FRA) is $3,345 per month. In order to qualify for checks this large, workers must earn the equivalent of at least $147,000 in today’s dollars during at least 35 years. But in 2023, those who qualify for the maximum benefit will get $3,627 per month at their FRA.
The future of Social Security taxes
The massive sums the Social Security Administration takes in each year from Social Security taxes aren’t enough to pay for all the benefits seniors and workers with disabilities qualify for. So the government has to tap the program’s trust funds each year to make up the difference. And those trust funds are running out.
The latest predictions estimate that the trust funds will be fully depleted in 2035. Once that happens, the program will only be able to pay out about 80% of scheduled benefits. And that could lead to benefit cuts if the government doesn’t make some changes before then.
Nothing’s been decided yet, but one of the proposed changes is to raise the Social Security payroll tax. All workers would have to pay a larger percentage of their income to the government in order to fund Social Security. This could help the program remain solvent for decades. But it could also make paying the bills a lot more challenging for workers.
That said, there’s no need to panic about this quite yet. The government hasn’t decided anything yet, and it still has 12 years left to do so. It’s possible it comes up with another way to fund the program that doesn’t require a significant increase to the Social Security payroll taxes.
In the meantime, all we can do is wait and do our best to save for retirement on our own so we aren’t as dependent upon Social Security. No matter what, you’ll get some sort of benefit, as long as you’ve worked enough. But you’ll have a better chance of remaining financially secure if you’re prepared to pay for most of your bills on your own.
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