Since being signed into law in 1935, Social Security has been tasked with providing a financial foundation for our nation’s retired workers. Today, more than 65 million Americans receives a monthly payout, approximately 72% of which are retired workers. Additionally, nearly 22 million recipients are pulled out of poverty each year as a result of the program.
But Social Security is also dynamic. Every October, the Social Security Administration (SSA) releases a fact sheet detailing all of the changes to expect in the upcoming year. This past week happened to feature that announcement.
Here’s a look at the seven biggest changes to Social Security in 2022.
The headline change, and the one all 65 million-plus beneficiaries have been eager to hear, is that the cost-of-living adjustment (COLA) for 2022 came in at 5.9%. In English, this means all beneficiaries will see their monthly payout increase by 5.9% come January. According to the SSA, this is estimated to work out to a $92 monthly increase for the average retired worker to $1,657.
All told, this 5.9% “raise” is the biggest boost for Social Security recipients since 1983, and it’s a reflection of the high levels of inflation being contended with by all Americans. Rapidly rising fuel costs, along with steady increases in food, shelter, and medical costs, are primarily responsible for this historic payout bump.
However, you’ll note that I’ve purposely put “raise” in quotation marks. This is to reflect that COLA is a measure designed to keep beneficiaries on par with inflation and not help them “get ahead.” The reality is that the purchasing power of Social Security income has been on a precipitous decline since 2000, and even next year’s big monthly boost is liable to be offset by higher prices for goods and services.
Back in 1983, the last major overhaul of the Social Security program was signed into law. The Amendments of 1983 introduced the taxation of benefits, gradually increased the payroll tax on all working Americans, and set forth a very staggered increase to the full retirement age (FRA) — i.e. the age where a person becomes eligible to collect 100% of their monthly retirement benefit, as determined by their birth year.
Since Social Security’s inception, there have only been 11 increases to the program’s full retirement age. In 2022, we’ll see the 12th and final increase of two months, which will lift the full retirement age from 66 years and 10 months for persons born in 1959 to 67 years for anyone born in 1960 or later.
Think of the full retirement age as your personal line in the sand. If you begin taking your retirement benefit at any point prior to hitting your FRA, you’ll be accepting a permanent reduction to your monthly payout. Conversely, waiting until after your FRA to begin taking your retirement benefit can lift your monthly payout above 100%.
Last year, the Social Security program collected just shy of $1.12 trillion in income. Approximately $1 trillion was the result of the 12.4% payroll tax on earned income (wages and salary, but not investment income).
This year, Social Security’s payroll tax is applied to earned income ranging from $0.01 to $142,800. Any earned income above $142,800 is exempt from the payroll tax. But in 2022, the maximum taxable earnings cap is rising by $4,200 to $147,000. While most Americans aren’t making $147,000 or more annually, it does mean high earners (about 6% of the workforce hits this taxable earnings cap) could be taxed up to an extra $520.80 in the upcoming year.
For those curious, this maximum taxable earnings cap isn’t an arbitrary figure plucked out of thin air. Rather, it’s based on the year-over-year increase in the National Average Wage Index (NAWI). The percentage increase in the maximum taxable earnings cap is commensurate with the percentage jump in the year-over-year NAWI.
Although high-earning workers will be paying more into Social Security next year, well-to-do retired workers also have the opportunity to collect a beefier monthly payout. In 2021, maximum monthly benefits at full retirement age were capped at $3,148. But in 2022, the maximum monthly payout for the rich is increasing by $197 a month to $3,345.
Keep in mind that it’s not easy to net this maximum monthly payout from Social Security. Three criteria must be met to receive this monster benefit. Retirees would need to:
Working Americans might not realize it, but filing for retirement benefits before hitting full retirement age comes with some drawbacks. Aside from a permanently reduced monthly payout, it can also expose beneficiaries to the retirement earnings test. The retirement earnings test allows the SSA to withhold some or all of a beneficiaries’ payout if they earn above predetermined income thresholds.
As an example, early filers who won’t hit their full retirement age in 2021 can have $1 in benefits withheld for every $2 in earned income above $18,960 ($1,580/month). Meanwhile, early filers who will hit their FRA in 2021 are allowed to earn up to $50,520 ($4,210/month) before $1 in benefits can be withheld for every $3 in earned income above this threshold.
In 2022, both of these income threshold levels are increasing. Early filers who won’t hit their FRA will be allowed to net $19,560 ($1,630/month) before benefit withholding kicks in. As for retired workers who will hit their FRA next year, the income threshold is rising to $51,960 ($4,330/month).
Keep in mind that the retirement earnings test no longer applies once a person hits their full retirement age.