A Look at Social Security As 2021 Ends and 2022 Begins

The biggest news for social security recipients is that payments to almost 70 million Americans will get a significant 5.9% COLA (cost of living adjustment) for the fiscal year 2022, which began on October 1st, 2021. This is the highest COLA in 40 years — since Ronald Reagan’s first presidential term in 1982. The current increase reflects the steep price increases we have seen in everything from gasoline to cars to bacon.

This increase would be a substantial increase over the 1.3% COLA applied for fiscal 2021 (which was almost the lowest adjustment ever made). The adjustment is based on the CPI (The Bureau of Labor Statistics Consumer Price Index, which is a commonly used proxy for inflation.)

The 5.9% COLA has significance because each year the COLA is based on the average of the July, August, and September CPI data. The COLA for fiscal 2022 will be the highest one paid since 1983 when it was 7.4%. 2022 will see an increase in how much money working social security recipients can earn before their benefits are reduced and a slight rise in disability benefits.

Tax Consequences 

Social security benefits will remain the same as for 2021, which is 6.2% on employees and 12.4% on the self-employed.

Don’t Forget About Inflation

Inflation has reared its ugly head this year. Inflation acts as a tax on anyone who purchases any goods or services.

Maximum Benefit Increase

The flip side of the increase in the tax rate is that as the taxable maximum income increases, so does the maximum amount of earnings used by the Social Security Administration (SSA) to calculate retirement benefits. In 2022, the maximum benefits one can receive increased by $197 per month to $3,345. In 2021, the maximum monthly benefit for a worker retiring at full retirement age was $3,148.

The Full Retirement Age Continues Rising

The absolute earliest that you can start claiming your social security benefits is at age 62. However, we don’t recommend this because submitting a claim before your full retirement age will result in a reduced payout that is permanent. Currently, the retirement age for social security purposes is set to increase by two months each fiscal year until it hits age 67. If you turned 62 in 2021, then your full retirement age is 66 and 10 months. Unless there are changes in the law, anyone born in 1960 or later will not reach full retirement age until they are 67.

Delaying the collection of social security benefits past your full retirement age, then you can collect more than the “full” or normal payout. For instance, if you put off claiming benefits until age 70, you will receive an annual payout that is up to 32% higher than if you started receiving benefits at full retirement age. There is no incentive to delay receiving benefits past age 70 as the monthly benefit stops increasing.

For those that work while collecting social security benefits, then all or part of your benefits may be temporarily reduced, depending on your level of earnings. Fortunately, those income limits have increased slightly for 2022. Before full retirement age, you are permitted to earn up to $19,560 in 2022. Once you exceed that limit, $1 will be deducted from your payment for every $2 that exceeds the limit. The 2022 annual limit represents a $600 increase over the 2021 limit of $18,960.

Up to full retirement age in 2022, you will be able to earn $51,960. This is an increase of $1,440 from the 2021 annual limit of $50,520. Above the full retirement age limit, you start to get penalized. So, for every $3 you earn over the limit, your social security benefits will be reduced by $1, but that will only apply to money earned in the months before hitting full retirement age. Once you reach full retirement age, no benefits will be withheld if you continue working.

Social Security Disability Benefits Increased

Social Security Disability Insurance (SSDI) is a program in which workers can earn coverage for benefits by paying social security taxes through their paycheck. The program provides income for those who can no longer work due to a disability, to help replace some of their lost income. Most years payments increase only increase slightly, however; the 9.6 million Americans who receive social security disability benefits will be pleased to learn 2022’s 5.9% increase will result in a more noticeable boost in benefits.

Credit Earning Threshold Went Up

If you were born in 1929 or later, then you must earn at least 40 credits (maximum of four per year) over your working life to qualify for social security benefits. The amount it takes to earn a single credit goes up slightly each year. For 2022, it will take $1,510 in earnings per credit, up $40 from 2021. The number of credits needed for disability depends on your age when you become disabled.

Shortfalls Ahead?

According to the most recent 2021 Social Security and Medicare Boards of Trustees annual report, both trust funds face depletion in the decades ahead. If the predictions hold, it means that beginning in 2033, retirees who receive money from the Old-Age and Survivors Insurance (OASI) Trust Fund benefits, will receive about three-quarters (76%) of their scheduled benefit; those who receive payouts from the Disability Insurance (DI) Trust Fund will receive 91% of their benefit, starting in 2057. The report concludes by urging lawmakers to address these financial shortfalls, “taking action sooner rather than later.”

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