Social Security Benefits in 2022: How Much Will Your Benefits Increase?
Social Security benefits have been helping retirees cover their retirement expenses for decades now. Officially known as the federal Old-Age, Survivors, and Disability Insurance (OASDI) program, Social Security is a federal program that offers retirement benefits to certain qualified retirees, disabled individuals, and their spouses and children. Social Security is the biggest benefits program in the world. President Franklin D. Roosevelt set up Social Security under the Social Security Act in 1935. The monthly average Social Security check was just about $22.60 then. In 2021, it is $1,565.
There are specific qualification criteria for Social Security benefits. You can qualify for these benefits if you are fully insured and have earned enough credits. These credits can be achieved on your income. They are also known as quarters and are awarded to you for every $1,470 that you earn. For every $1,470, you get one quarter. An individual can earn up to four credits or quarters in a year. In total, you would need 40 quarters to qualify for a Social Security benefits check in retirement. You can start receiving the benefits as soon as you reach the age of 62 years. However, if you wait to draw your check till the age of 70, you can get a higher check. To understand the benefits of delaying your Social Security checks in detail, get in touch with a professional financial advisor who may guide you on the same.
Social Security benefits are decided based on a few things. The first is your income before retirement. However, a person’s income increases over time, as per the changing times and inflation. Similarly, a person’s pension benefits also have to increase over time depending on the cost of living adjustment (COLA).
The Social Security COLA 2022 estimate has increased and has subsequently boosted the Social Security benefits checks for over 70 million individuals. Keep reading to find out the new Social Security raise and how it has been calculated.
Does Social Security increase with inflation?
The answer to whether Social Security is adjusted for inflation or not, is a yes. Social Security benefits increase with a rise in inflation. The Social Security increase is directly proportional to the rising prices of goods and services. To understand this better, you first need to understand the connection between COLA and Social Security benefits.
The Social Security Administration (SSA) calculates the Social Security COLA based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). As per the 1972 Social Security Amendments, the CPI-W considers the change in the prices of groceries, housing, fuel, clothing, and more each year and adjusts the COLA for Social Security benefits accordingly.
The Social Security COLA is the difference between the CPI-W for the third quarter of the last year and the CPI-W for the current year. The increase in the CPI-W for the current year is known as the Social Security COLA. In the case of an increase, the Social Security benefits are increased accordingly. However, in the case of a drop in the CPI-W or if the value remains the same, there is no change in the benefits as the cost of living remains the same. This last happened in the year 2015.
The CPI-W moves upwards in the same direction as inflation. As a result, the cost of living also increases, and the Social Security benefits are adjusted in tandem.
Did Social Security increase in 2022?
Yes, Social Security benefits are getting a raise in 2022 by a whopping 5.9%. This is the most significant Social Security raise in 39 years. The only other time when the Social Security increased more than this was in the year 1980 when the Social Security cost of living increase was recorded at 14.3%. The inflation rate that year was 13.5%. Apart from this, in the recent past, the year 2008 saw an increase in COLA by 5.8%. In 2011, the benefits were increased by 3.6%.
The COLA increase 2022 is undoubtedly good news for all retirees and their families. Given the turbulent year of 2020 when the Covid-19 pandemic wreaked havoc on the American economy, the increased COLA is a good surprise for the retirees of the United States. This can be particularly great for people retiring next year as they can start their retirement with a high pension. Moreover, since this is the largest increase in the last 39 years, which amounts to nearly four decades, the Social Security cost of living increase is expected to be a landmark decision. However, it is crucial to understand how the Social Security increase 2022 affects you as a retired individual and find out if these benefits are only valid on paper or not.
How much is the Social Security check going to be in 2022?
After the 5.9% Social Security raise, the average Social Security check is expected to be $1,657 a month in 2022. This is a $92 increase from the $1,565 average payment in 2021. For a couple where both the partners are drawing their individual Social Security benefits, the benefits can amount to $2,753 per month. This is $154 higher than last year.
However, these numbers are not uniform as the Social Security benefits money can differ for different people based on their previous checks. If you were drawing less than $1,565 in 2021, you would not see a $92 increase this year. So, to calculate your new Social Security check for 2022, you have to add the 5.9% raise to your last drawn benefits check. For instance, if you earned $1,200 in 2021, your new check in 2022 will be $1270.8. You will receive a $70.8 raise in your benefits.
The precise increase for every retiree can be different. It will be more for people who draw higher benefits and lower for those who draw lower benefits. Therefore, to determine how your purchasing power is likely to increase for the New Year, you must calculate your benefits.
Do you have to do anything to receive the new 5.9% Social Security raise?
In December, the SSA will send out notices containing the revised information on the new COLA for 2022. All qualified retirees, disabled individuals, as well as surviving spouses and children eligible to receive Social Security benefits will receive these notices by mail. Eligible retirees and others can also check their Social Security cost of living increase online by logging on to their Social Security account.
What things should retirees keep in mind about the Social Security raise in 2022?
Here are some other changes made to the Social Security benefits and the repercussions of the rise in Social Security COLA that you must know of:
- The earnings limit has increased for 2022:
- The credit-earning threshold has increased for 2022:
- The tax paid on Social Security benefits will increase
- The Medicare premiums will be withdrawn from your Social Security checks:
- The rate of inflation is still rising
Up until 2021, the earnings limit for an individual was capped at $18,960. This meant that your Social Security benefits check could reduce if you earn more than the earnings limit. If you were earning more than $18,960 in 2021, the SSA kept $1 for every $2 that you made over the limit of $18,960. For instance, if you earned $19,960, the SSA would keep $500. However, the earnings limit has been increased for the year 2022. The new limit in 2022 will be $19,560.
If you continued to work after the full retirement age in 2021, the annual limit was $50,520. So, for every dollar earned over $50,520, the SSA withheld $3. In 2022, the annual limit has been increased to $51,960. You will now pay $3 for every $1 earned over $51,960 in 2022. This can help you earn more money.
As explained above, the Social Security benefits program works on credits or quarters. As of 2021, you get one quarter for every $1,470 that you earn. The maximum number of credits that you can make is capped at 40. However, starting 2022, the new credit-earning threshold will be capped at $1,510. From January 2022, you will get one quarter for every $1,510 that you earn. This is a $40 increase from last year and could be of concern to retirees, as you will have to make more to accumulate credits in your account. The maximum quarters that can be acquired in a year still remains the same at four.
Social Security benefits garner some taxes like the payroll tax paid by the employee and the employer under the Federal Insurance Contributions Act (FICA) and the self-employment tax under the Self-Employment Contributions Act (SECA). The former is paid as per your net income. As of 2022, the tax rate for the employee as well as the employer is fixed at 6.2%. If you work for a company, your employer will withhold this amount and pay the tax to the government. The tax liability, in this case, will be shared by you and your employer. If you are self-employed, the responsibility to pay the 12.4% tax (6.2 + 6.2) is on you. In addition to this, you also pay Medicare taxes amounting to 2.9%. These are also split between the employer and the employee. This has been the same for 2021 and 2022.
The Social Security benefits tax limit was $142,800 in 2021. However, it has been increased to $147,000. This is a 2.9% hike in the tax rate and can affect over 12 million individuals. This means that you can withhold a maximum of $9,114 tax from your paycheck in 2022. This can be bad news for those earning high incomes. The higher income, the higher can be the tax levied on it.
While the 5.9% Social Security cost of living increase may sound like a good enough hike, it is important to understand that this increase will accommodate your Medicare premiums. The premium for your Medicare Part B will be withdrawn from your Social Security checks directly. The Medicare Part B premium is expected to rise to $170.10 in 2022. This can impact your overall Social Security increase. For instance, if you get $1,657 a month in 2022, you can earn up to $19,884 per year. However, you will have to pay the premium for Medicare Part B amounting to $170.10, bringing your total to $19,713.9. If you earned $1,565 a month in 2021, and earned $18,780 overall in 2021, your overall increase will be $933.9 ($19,713.9 - $18,780) and not $1104 ($19,884 - $18,780).
The inflation in the country is rapidly increasing after the pandemic. Given the circumstances, it is still debatable if the rise in the COLA for 2022 will have any real impact on retirees. Moreover, with the Medicare Part B premium cuts and the increase in Social Security taxes, retirees still have a lot to think about in the next year. An important thing to note here is that the Social Security COLA is calculated based on the CPI-W. The CPI-W is further calculated on the basis of the rise in prices of food, housing, clothing, etc. It does not consider expenses like healthcare, one of the primary concerns for retirees. The inflation in healthcare cannot be compared to the inflation in the price of groceries. As a result, the Social Security COLA may not be a conclusive factor to base the calculation of benefits.
The Social Security benefits are also depleting rapidly. Reports suggest that these benefits have lost 30% purchasing power since the year 2000. As per other reports, the Social Security trust fund is likely to be exhausted by 2033. Based on the current payroll taxes, the Social Security program will only be able to pay 80% of the assured benefits to retirees in the future. The strategy of waiting till the age of 70 is also losing its sheen as the maximum amount of Social Security benefits that you can draw at 70 is now capped at $4,194 per month starting 2022.
What can retirees do to ensure a financially secure retirement?
Given the inconsistencies in the Social Security benefits program, relying solely on your benefits may not be ideal. Therefore, it is strongly recommended to start saving for your retirement from an early age. This can begin as early as your 20s. It can help to keep a blend of stocks, bonds, real estate, etc., in your investment portfolio. You can save in employer-sponsored retirement plans like the 401(k) too. If not, you can open an Individual Retirement Account (IRA). In addition to this, you can open a health savings account or buy health, long-term care, and life insurance too. Retirement is a long phase of your life, so having a retirement plan is imperative for your financial well-being.
The increase in the Social Security COLA is a pleasant change in the benefits program. However, its actual impact is still debatable and can mean different things to different people. This is why it may be advised to also save in different retirement savings instruments like the 401(k) retirement account and the IRA, along with other investments to financially secure your retirement. In addition to this, you may also consult a professional financial advisor to see how the tax rate and Medicare Part B premium can impact your earnings from the Social Security benefits program in 2022.
To get in touch with a fiduciary advisor who may help you understand the changes in Social Security benefits in 2022 and its impact on your finances, use the free advisor match service. Based on your requirements, the platform scans through registered and qualified advisors to match you with an advisor suited to your financial needs and goals.