If it feels like tax rules and retirement plan limitations are constantly changing, that’s because they are. And, once a year, Social Security benefits are also reviewed and up for potential adjustments. So, while the fundamentals of retirement planning and taking social security benefits may remain the same, there are years when we see more changes than others.
Recently, the Social Security Administration released important facts and figures for 2022 from cost-of-living adjustments (COLA) for retirees, and tax changes for the currently employed. The good news is that the COLA is increasing. Considering increases to the COLA are never guaranteed, this is a welcome change. But the bad news is that taxes will be increasing, too—at least for some. Below we break down the major changes and how you should approach these adjustments in your finances for the upcoming year.
Increase in the COLA
On October 13, 2021, the Social Security Administration (SSA) officially announced that Social Security recipients will receive a 5.9% cost-of-living adjustment (COLA) for 2022. This is the largest increase in four decades and will begin with benefits payable to more than 64 million Social Security beneficiaries in January 2022. Increased payments to more than 8 million Supplemental Security Income (SSI) beneficiaries will also begin on December 31, 2021.
Of course, we weren’t entirely surprised since the COLA is often based on the Consumer Price Index (CPI) which has risen substantially in our post-COVID environment. Many economists predicted a bump of as much as 6.1% but the 5.9% increase is still substantial. Of course, some investors fear that rising consumer prices will drown out the COLA increase in no time with inflation running at more than 5%. But regardless of how inflation will affect the increases, beneficiaries are grateful for the bump to at least try and keep pace with the rising cost of goods and services.
Higher Earnings Test Limit
It is possible to collect Social Security while also working, but if you do so before reaching full retirement age (FRA), you’ll need to adhere to the earnings test limit if you want to avoid having some of your benefits withheld. Each year the limit changes. Luckily for some, the limit is increasing from $18,960 to $19,560, so individuals can earn a bit more before their benefits begin to phase out. Of course, this will do little to impact high-income earners, but could result in a slight reduction of withheld benefits by the SSA.
Higher Wage Cap, Higher Taxes
If you aren’t familiar with Social Security, you may not know that workers do not pay taxes on all their earnings. Each year there is a wage cap put into place that determines how much income gets taxed. In 2021, earnings of up to $142,800 are subject to Social Security taxes. But come 2022, that wage cap will increase to $147,000. Lower earners won’t be impacted by this change, but higher earners could lose more of their income to Social Security.
So, for those still working, the amount of earnings subject to Social Security tax has increased 2.9% from $142,800 in 2021 to a maximum of $147,000 in 2022. But, the 2.9% increase in applicable income is only in reference to the Social Security portion of the combined tax rate. Employees and employers will each continue to pay 6.2% of applicable earnings toward the 7.65% combined Social Security and Medicare rate, and the self-employed will still be responsible for paying the full 15.3% of the Social Security and Medicare tax rate.
What to Do Next
Social Security can evolve substantially from one year to the next. Some years we see zero adjustments, and in others there may be several to contend with. If these increases surprise or concern you, let’s chat. While these numbers may not seem significant on the surface, it’s always a good idea to seek guidance from your financial professional when changes occur that impact your sources of retirement income.