The 2022 Social Security COLA is 5.9%--Its Largest Increase in 40 Years
Social Security beneficiaries are about to see the biggest increase in monthly benefits in 40 years. If you’re 62 or older, you should know how this change impacts you.
In today’s episode, I’m going to be sharing my tips for how you can prepare for next year’s 5.9% cost of living increase. But first, here’s a quick overview of what’s happening and why.
Social Security benefits rise automatically when the third-quarter consumer price index for urban workers increases year over year. This cost-of-living adjustment, or COLA for short, has averaged 1.4% over the last 12 years, including a 1.3% increase in 2021. The 5.9% COLA set to begin in January is the largest boost since 1982 when Social Security checks increased by 7.4%.
That means beneficiaries currently receiving the average monthly retirement benefit of $1,565 will see their monthly checks increased by $92 next year. In addition, the maximum retirement benefit currently at $3,148 per month will increase to $3,345 for those who retire at full retirement age in 2022.
If you’re wondering how this change affects you, you’re in the right place. Let’s run through some of the biggest questions you may have regarding the 2022 Social Security COLA.
First, who’s eligible for COLA?
Anyone age 62 or older and eligible to receive Social Security in 2022 will benefit from the 5.9% increase—even if you haven’t filed for benefits yet. That means there’s no reason to rush to file before January. The increase will be reflected in your Social Security benefits.
How does this change affect Social Security beneficiaries who are still working?
In 2022, the earnings cap to receive your full Social Security benefits will increase for those under full retirement age, as well as those at or above full retirement age. You can visit the Social Security Administration’s website to determine how much you can earn in 2022 without forfeiting part of your benefits.
So, what’s the catch?
While the bigger checks are certainly a good thing, keep in mind the cost-of-living adjustment is to help you maintain your standard of living despite inflation. Since items like food, gas, and utilities have generally increased in price, your budget may not change dramatically. That said, if you do have money left over each month, you may want to consider putting it towards your emergency fund or making an extra mortgage payment depending on your financial needs and priorities.
In addition, if you’re on Medicare or Medicaid, higher health care premiums are likely to offset some of the 5.9% increase. Once premiums are announced, you should get a letter from the Social Security Administration that details your net benefits for 2022.
Lastly, you may see your taxes go up. If Social Security is your only source of retirement income, you’re unlikely to see a change. However, if you have other sources of income, you could potentially move into a higher tax bracket with the cost-of-living adjustment. Be sure to consult your financial advisor or CPA to plan accordingly and avoid any surprises come tax season.
One Last Thing
If you’re self-employed, you may also see your taxes go up next year, even if you’re not eligible for Social Security benefits yet. In 2021, the 6.2% portion of the payroll tax that funds Social Security applies to the first $142,800 of gross earnings—in 2022, this will increase to $147,000. That means if you earn $147,000 or more next year, you’ll pay an extra $260 in FICA taxes.
Remember, this is a broad overview of the 2022 Social Security COLA and how this change might impact your personal finances. There are many factors that influence your Social Security benefits, your taxes, and your financial plan in general. Consider consulting a fiduciary financial advisor like Oak Capital Advisors to ensure you’re fully prepared for the changes ahead. If you’d like to learn more, please request a complimentary retirement readiness assessment.