Chris Stein, CFP®
New 2022 Social Security COLA Adjustments and History
Chris sits down on a solo mission to discuss and answer questions about the recently announced 2022 Social Security revisions.
COLA and Other Changes to Social Security for 2022
The first Social Security check was issued to Ida May Fuller on January 31, 1940, for $22.54. In 1950, Congress passed legislation increasing Social Security benefits and raised her check to $41.30. Another raise was voted through in 1954 and again in 1970. She would go on to receive 400 monthly checks until she died at age 100.
The increases that required an act of Congress were changed to annual raises to deal with the soaring inflation of the early 1970s. In 1972, Congress authorized the Cost of Living Adjustment (COLA) provision as part of the Social Security Amendment, and annual COLAs began in 1975.
COLAs are based on a Consumer Price Index called CPI-W that reflects the monthly price change for a basket of goods and services, including food, energy, and medical care. The average price for the basket in this year's third quarter (July, August and September) is compared with the same quarter last year. And the percentage change becomes the COLA for next year, starting in January.
Social Security Changes for 2022
The Social Security Administration releases a fact sheet every October with all the changes expected for the upcoming year. It has announced the COLA increase for 2022 as 5.9% to reflect rising prices.
Since Social Security pays one month in arrears, your December 2021 benefit will be adjusted upwards by 5.9 percent, payable to you in the following month (January 2022). It is calculated in October to meet that timeline. In December, you will receive a letter announcing this official increase and the amount of your monthly checks in 2022.
This year's 5.9% increase is the largest since 1982 when it was 7.4%. In 1980 and 1981, it was 14.3% and 11.2%, respectively, reflecting the high inflation in the U.S. at that time. But there have also been years with 0% COLAs.
People often ask if COLAs can be negative if prices drop in the third quarter of one year compared with another. No, they cannot. But you may not always get your total COLA adjustment.
Let's look at an example. This year the adjustment is 5.9%. Say prices go down next year by 2%. Social Security will not lower your Social Security benefit, but your COLA will be 0%. Say the following year inflation is 3%. You will probably only get 1% as a COLA because Social Security uses the difference to cover the 2% it couldn't deduct the year before.
We've had years when inflation has been negative. That happened in 2009 and 2010, after the Financial Crash of 2008, and then again in 2015, for the following January. The COLA was 0% in those years. So prices had to recover from the negative inflation, then increase beyond that before a cost of living adjustment was applied again to Social Security.
I don't have a crystal ball, but I don't expect price decreases across the board (the way CPI-W measures) in the near future. Some things will decrease after what the Federal Reserve expects to be a transitory period of inflation. Overall, I expect price inflation to slow but not reverse into "deflation" territory. But that's just my opinion.
Medicare and Your Social Security Check
Medicare Part B premiums are withheld from most people's Social Security benefits. So while there is lots of chatter that the increase in that premium will wipe out the gains from the 5.9% COLA increase, that's not true.
Although it hasn't been formally announced yet, expectations are that the Part B premium will increase by 6.7%. That premium's current baseline is $148.50 this year. So 6.7% of $148.50 is slightly less than $10. Next year, the premium should be close to $158.50.
On the other hand, the average Social Security benefit is between $1,500 and $1,600. So for the average person receiving Social Security benefits, a 5.9% COLA means about $100 more a month. You're still ahead by $90. Only if your Social Security is very small – actually about $170 a month – would your COLA increase be wiped out by the $10 increase in Medicare Part B premiums.
If your Social Security check is small, a hold-harmless provision ensures that your net Social Security benefit (your Social Security benefit minus the Medicare premium withholding) does not go down. For example, let's say your Social Security benefit only goes up by $5. If Medicare Part B premium goes up by $10, you would be protected, and your Medicare premium would only go up by $5. But you're not permanently protected. The next time you have a significant COLA increase, such as this year's 5.9%, the Medicare premium catches back up to everyone else's rate: $158.50 (unless you pay more because of something like IRMA).
The Earnings Test in 2022
The earnings test applies if you're claiming Social Security benefits before you reach your Full Retirement Age (FRA). Once you reach the month of your FRA, there is no more earnings test. As a result, you can earn as much as you want, and your Social Security will not be reduced.
But before your FRA (which is somewhere between ages 66 and 67), if you make more in 2022 than $19,560 ($1,630 a month), your Social Security benefit will be reduced by $1 for every $2 you earn above that figure from work (not from pensions, dividends, interest, etc.). But in the year you reach FRA, in the months before your FRA, you can earn up to $51,960 ($4,210 a month) before triggering the earnings test adjustment. And your offset will only be $1 for every $3 of excess earnings.
But that withholding is not lost to you. Once you reach FRA, Social Security will recalculate your retirement benefit check and give you credit for what was withheld. You won't receive a lump sum. Instead, it will be paid out over your life expectancy.
However, that doesn't apply to survivor and spousal benefits. If you take a hit due to the earnings test and have survivor or spousal benefits in place, those benefits do not adjust back up when you reach FRA. The loss is temporary for you but permanent for those receiving survivor or spousal benefits on your record.
The Maximum Taxable Earnings and Maximum Payouts in 2022
The maximum earnings subject to Social Security taxes in 2021 was $142,800 (of earned income, not investments). The tax on that was 6.2% for you and 6.2% for your employer. If you're self-employed, you pay both parts, and Medicare makes up the other 1.45% of that tax. In 2022, up to $147,000 can be taxed.
The maximum monthly payout at FRA was capped at $3,148 in 2021 but is increasing to $3,345 in 2022. This requires waiting for your FRA to collect benefits and having at least 35 years in which you hit or exceeded the maximum taxable earnings for that year. You can exceed those caps by waiting up to age 70 to claim your benefits and earn delayed retirement credits. The maximum in 2022 is then $4,194 a month.
Other Changes in Store for 2022
In 2022, we will see the final scheduled increase for the Full Retirement Age. It will go from 66 years and 10 months (for those born in 1959) to 67 years (for those born in 1960 or later).
Lastly, the bar to qualify for a retirement benefit requires earning 40 lifetime work credits, earned four credits per year. In 2021, an income credit was awarded for every $1,470 of earned income, or $5,880 a year. In 2022, the single credit requires $1,510 of earned income, or $6,040 a year.