Who is ready for 5 big changes in social security in 2022?

In 13 days, the curtain will close on 2021 and the world will hopefully have gone one step further to put the coronavirus pandemic in the rearview mirror. The New Year will be a time of hope, and for many, a time of change.

For the more than 65 million Americans who currently receive a Social Security benefit each month, as well as for those who contribute to the program with every paycheck, this will certainly be the time for a change. Below are five of the biggest changes Social Security recipients, and even some workers, can expect in 2022.

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1. Biggest increase in payments in almost four decades

Without a doubt, the most significant change beneficiaries can expect in 2022 is a larger monthly payment.

The Social Security Cost of Living Adjustment (COLA) is the program’s inflationary linkage which is tied to the Consumer Price Index for Urban and Office Workers (CPI-W). The percentage change in the average reading of the CPI-W from the third quarter (July to September) from the previous year to the third quarter of the current year represents how much beneficiaries can expect to increase in earnings. payments. Note that the other nine months of the year are not used in the calculation of Social Security COLA.

With rapidly rising costs for fuel, food, shelter and medical care, the program’s COLA for 2022 stood at 5.9%. This is the largest year-over-year increase since 1983. In nominal terms, the average retired worker is expected to see their wages increase by $ 92 per month to reach $ 1,657.

However, before you whip out the celebratory champagne, understand that higher inflation will likely absorb most, if not all, of that increase in benefits. The Bureau of Labor Statistics November inflation reading stood at 6.8%. Meanwhile, the Senior Citizens League, a non-partisan seniors advocacy group, estimates the purchasing power of Social Security dollars has declined 32% since 2000 for retired workers.

Two social security cards placed on a W-2 tax form.

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2. High incomes will open their wallets a little more

Although Social Security generates income in three ways, the vast majority of income generated by the program comes from payroll tax. This is a 12.4% tax on labor income (wages and salaries) imposed on employers and employees. Workers share the 12.4% tax with their employer (6.2% each), or cover all 12.4% if they are self-employed.

In 2021, all income earned between $ 0.01 and $ 142,800 was subject to payroll tax. In 2022, the taxable earnings limit will drop from $ 4,200 to $ 147,000. Salaries and wages earned above this ceiling are not subject to payroll tax.

For the over 90% of working Americans who earn less than $ 147,000 a year, nothing changes. This means that they will pay Social Security for every dollar earned, as they did in 2021. But the 6% of working Americans who will earn more than $ 142,800 in 2022 will have to open their wallets a bit more to cover more. payroll tax. This increase in the cap of $ 4,200 could result in up to $ 520.80 in additional taxes next year.

An hourglass next to stacks of coins.

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3. New eligible beneficiaries will have to wait a little longer to receive a full payment.

Almost four decades ago, Congress passed the last major overhaul of the Social Security program. The bipartisan Social Security changes of 1983 gradually increased payroll taxes over time, introduced the taxation of social security benefits, and provided a timetable to gradually increase the full retirement age, that is, ie the age at which a beneficiary becomes eligible to receive 100%. of their monthly payment.

In 2022, newly eligible retired beneficiaries will have to wait even longer than their retired predecessors to receive a full payment. This is because 2022 marks the final increase in the full retirement age to 67, as set out in the 1983 amendments. Anyone born in 1960 or later will have to wait five full years after being initially eligible. to start collecting their payment before they can receive 100% of what is owed to them, depending on their work and income.

Want to claim early? Understand that early declaration at age 62 could reduce your monthly benefit by up to 30% compared to what you would have received if you had waited until age 67.

An elderly person counting a stack of money in his hands.

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4. The better-off can perceive a greater gain

On the one hand, high-income workers will need a little more over the next year. But for the well-to-do workers who have already retired and are on a monthly Social Security benefit check, their payoff is about to get even sweeter.

This year, the maximum monthly benefit payable by the Social Security Administration at full retirement age is $ 3,148. But by 2022, that maximum payment at full retirement age increases by almost $ 200 per month to reach $ 3,345. That’s over $ 40,100 a year.

Earning this maximum payout is not easy. Only a small single digit percentage of retirees actually collect the monthly maximum. But that maximum monthly payment may be on your radar during retirement if you meet all three of the following criteria:

  • Wait until full retirement age to apply for benefits.
  • Work at least 35 years to avoid having an average of $ 0 counted towards your monthly payment for each year under 35 worked.
  • Generate earned income equal to or greater than the taxable income limit for 35 years.

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5. Withholding thresholds increase for early filers

Last, but not least, early filers – retired workers who have not yet reached full retirement age – can expect changes in the withholding thresholds for the retirement earnings test. . The retirement income test allows the Social Security Administration to withhold some or all of a beneficiary’s payment, depending on the amount of their income.

For example, early filers who did not reach full retirement age in 2021 were only allowed to earn $ 18,960 ($ 1,580 / month) before $ 1 in benefits was withheld for. every $ 2 of income earned above this threshold. In 2022, this threshold increases from $ 600 to $ 19,560 ($ 1,630 / month). In other words, early filers can earn a bit more before the holdback applies.

The same goes for retired workers who will reach full retirement age in the current year, but have not yet done so. This year, retirees who met this definition were allowed to earn up to $ 50,520 ($ 4,210 / month) before $ 1 in benefits was withheld for every $ 3 of income earned above the threshold. The threshold will drop from $ 1,440 to $ 51,960 ($ 4,330 / month) for retirees who reach full retirement age in 2022.

Please note that once you reach full retirement age, the retirement income criterion no longer applies. In short, the Social Security Administration cannot withhold benefits no matter how much you earn.

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