Who’s Ready for 5 Big Social Security Changes in 2022?

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

For the more than 65 million Americans currently receiving a Social Security benefit each month, as well as those who pay into the program with each paycheck, it’ll certainly be a time for change. Below are five of the biggest changes Social Security recipients, and even certain workers, can expect in 2022.

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1. The biggest payout increase in nearly four decades

Without question, the most front-and-center change beneficiaries can expect in 2022 is a larger monthly payout.

Social Security’s cost-of-living adjustment (COLA) is the program’s inflationary tether that’s tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The percentage change in the average CPI-W reading from the third quarter (July through September) of the previous year to the third quarter of the current year represents how much of a payout boost beneficiaries can expect. Note, the other nine months of the year aren’t used in calculating Social Security’s COLA.

Thanks to rapidly rising fuel, food, shelter, and medical costs, the program’s COLA for 2022 came in at 5.9%. That’s the biggest year-over-year increase since 1983. In terms of nominal dollar amount, the average retired worker should see their payout rise by $92 a month to $1,657.

However, before breaking out the celebratory champagne, understand that higher inflation will likely eat up most, or all, of this benefit hike. The November inflation reading from the Bureau of Labor Statistics came in at a blistering 6.8%. Meanwhile, The Senior Citizens League, a nonpartisan senior advocacy group, estimates the purchasing power of Social Security dollars has declined by 32% since 2000 for retired workers.

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2. High earners will be opening their wallets a bit wider

Although Social Security generates income three ways, the vast majority of revenue that’s raised for the program comes from the payroll tax. This is a 12.4% tax on earned income (salary and wages) placed on employers and employees. Workers split the 12.4% tax with their employer (6.2% each), or cover all 12.4% if self-employed.

In 2021, all earned income between $0.01 and $142,800 was subject to the payroll tax. In 2022, the maximum taxable earnings cap will rise $4,200 to $147,000. Salary and wages earned above this cap aren’t subject to the payroll tax.

For the more than 90% of working Americans who earn less than $147,000 on an annual basis, nothing changes. This means they’ll be paying into Social Security on every dollar they earn, just as they did in 2021. But the 6% of American workers who will make more than $142,800 in 2022 will have to open their wallets a bit wider to cover extra payroll tax. This $4,200 cap increase could result in up to an extra $520.80 in taxation next year.

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3. Newly eligible beneficiaries will have to wait a bit longer to collect a full payout

Nearly four decades ago, Congress passed the last major overhaul of the Social Security program. The bipartisan Social Security Amendments of 1983 gradually raised the payroll tax over time, introduced the taxation of Social Security benefits, and provided a timeline to gradually increase the full retirement age — i.e., the age at which a beneficiary becomes eligible to receive 100% of their monthly payout.

In 2022, newly eligible retired beneficiaries will have to wait even longer than their retired predecessors to collect a full payout. That’s because 2022 marks the final increase in the full retirement age to 67, as outlined in the Amendments of 1983. All persons born in 1960 or later will have to wait a full five years after they’re initially eligible to begin taking their payout before they can receive 100% of what they’re due, based on their work and earnings history.

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

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4. The well-to-do can collect a bigger payout

On one hand, workers with high incomes will owe a bit more in the upcoming year. But for well-to-do workers who’ve already retired and are collecting a monthly Social Security benefit check, their reward 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 in 2022, this maximum payout at full retirement age is rising by almost $200 a month to $3,345. This works out to over $40,100 a year.

Earning this maximum payout isn’t easy. Only a low single-digit percentage of retirees actually receive the monthly maximum. But this max monthly payout may be on your radar during retirement if you meet the following three criteria:

Wait until full retirement age to claim benefits.
Work at least 35 years to avoid a $0 being averaged into your monthly payout calculation for each year less than 35 worked.
Generate earned income equal to or above the maximum taxable earnings cap for 35 years.

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5. Withholding thresholds are rising for early filers

Last, but not least, early filers — retired workers who haven’t yet reached full retirement age — can expect changes to the retirement earnings test withholding thresholds. The retirement earnings test allows the Social Security Administration to withhold some or all of a beneficiary’s’ payout, depending on how much they earn.

For example, early filers who didn’t 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 in earned income above this threshold. In 2022, this threshold is increasing by $600 to $19,560 ($1,630/month). In other words, early filers can earn a bit more before withholding would kick in.

The same is true for retired workers who will hit their full retirement age in the current year, but have yet to do 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 each $3 in earned income above the threshold. The threshold will rise $1,440 to $51,960 ($4,330/month) for retirees who’ll hit their full retirement age in 2022.

Take note that once you reach full retirement age, the retirement earnings test is no longer applicable. In short, the Social Security Administration can’t withhold benefits, no matter how much you earn.

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