The COLA Increase and Other Big Social Security Decisions From This Year
Social Security might seem like a staid, never-changing government benefits program, but the reality is that certain details about Social Security change nearly every year. In 2021, some major changes were announced to the program, particularly when it comes to the annual cost-of-living adjustment. However, the year also saw some other notable changes to Social Security that you should be aware of, whether you’re close to retirement or far from it. Here are the most significant Social Security changes for 2021 that could impact the choices you make in your retirement planning.
Social Security Schedule: When the First COLA Checks Will Arrive in January 2022
Social Security 2022: How the COLA Will Increase Benefits for the Average Senior Couple
Increase in Social Security Wage Base
Social Security is funded primarily by taxes on wages. Workers pay 6.20% of their income to Social Security, with an additional 1.45% to Medicare, and employers pay a matching amount on behalf of employees. However, income above a certain level, known as the Social Security wage base, is not subject to Social Security taxes. For 2022, the wage base takes a significant jump, from 2021’s $142,800 to $147,000. This means that high-income taxpayers will be paying Social Security taxes on an additional $4,200 in earnings.
Find Out More: The Biggest Problems Facing Social Security
Social Security Trust Fund Will Run Out Sooner Due To the Coronavirus Pandemic
The Old-Age and Survivors Insurance Trust Fund, which is the fund that collects the taxes paid to provide Social Security payments, is slated to run out of money by 2033. This projection is one year earlier than the 2034 estimate that the Social Security Administration made prior to the outbreak of the coronavirus.
If and when the Social Security trust fund does run out of money, this doesn’t mean that Social Security will cease to exist, in spite of what some alarmists may report. What it does mean is that the only source of funding for Social Security retirement benefits will by the amount raised by Social Security taxes on existing workers. Unless adjustments are made to Social Security before that date, retirees might only receive about 78% of their expected payouts. However, various solutions to this dilemma have been proposed, including raising the Social Security wage base, which would generate additional Social Security taxes, or pushing back the date of full retirement, which would reduce the amount of total benefits paid out.
Perhaps the most newsworthy change to Social Security in 2021 was the dramatic increase in the annual cost-of-living adjustment. Every year, the Social Security Administration adjusts retirement payouts based on the annual change in the inflation rate. For the last 12 years, the annual COLA has been almost nonexistent on a historical basis. In three years, for example — 2010, 2011 and 2016 — the COLA was 0.0%. For the past two years, 2020 and 2021, the COLA was just 1.6% and 1.3%, respectively. For 2022, the COLA will jump a whopping 5.9%, the highest since July of 1982, when it hit 7.4%.
For 2022, the average Social Security payout for all retired workers would be $1,565 before the cost-of-living adjustment. But with the big COLA adjustment for 2022, the average retired worker will now receive $1,657 per month. For an aged couple, with both receiving benefits, the average payout will jump from $2,599 to $2,753. That’s welcome news for retirees living on a fixed income.
Retirement Earnings Test Exempt Amounts Increase
Social Security beneficiaries have the right to continue working, but they may see their benefits decrease. Under full retirement age, which is 67 for workers born in 1960 or later, workers can earn up to $19,560 per year, or $1,630 per month, without worrying about a payout reduction in 2022. This is up from $18,960 per year ($1,580 per month) in 2021. Once that threshold is crossed, the Social Security Administration will withhold $1 of benefits for every $2 in earnings above the limit. So, in 2022, workers who earn $20,560 will see their benefits reduced by $500 annually. Those benefits aren’t lost, they are just temporarily suspended until a worker reaches full retirement age. Then, benefits are increased to incorporate these suspended payments.
The year a beneficiary reaches full retirement age, the retirement earnings threshold jumps to $51,960 per year, or $4,330 per month. This is up from $50,520 per year and $4,210 per month in 2021. Above that threshold, Social Security benefits are temporarily reduced by $1 for every $3 earned. Beginning the month an individual reaches full retirement age, there are no earnings thresholds or payout reductions.
More From GOBankingRates