From shopping at the grocery store to just reading the news, it’s hard to miss rising prices. Whether inflation is temporary or here to stay, it’s clear many things cost more now than they did a year ago. And that’s led to a big boost in Social Security checks. The Social Security Administration recently announced that it has given its annual Cost of Living Adjustment (or COLA) rate a 5.9 percent boost for 2022. It’s the biggest increase in 40 years.
Here’s how much retirees’ monthly checks will go up in 2022 — and what you need to know about how it could affect your financial planning.
What changes to expect
More than 70 million retired Americans rely on Social Security to pay their bills every month; there are about 64 million Social Security beneficiaries and 8 million Supplemental Security Income recipients. Some Americans receive both benefits.
As the average Social Security beneficiary receives about $1,565 a month this year, the scheduled 5.9 percent increase will amount to an extra $92 a month — or $1,104 extra over a full year. That works out to a new monthly benefit of $1,657 for the average retiree.
There are also some changes to note if you’re still in the workforce. Social Security tax is 6.2 percent of your paycheck (your employer pays another 6.2 percent — if you’re self-employed you pay the full 12.4 percent). But you only pay the tax on a certain amount of your earnings. That amount is increasing from $142,800 to $147,000.
Things to keep in mind
While you can start claiming Social Security beginning at age 62, you must be at your full retirement age (FRA) (either age 66 or 67, depending on when you were born) in order to receive 100 percent of your benefit. Additionally, for every year that you delay receiving these funds after your FRA up to age 70, you’ll receive an 8 percent bump in your benefits, which will remain in place for the rest of your life.
The maximum Social Security benefit for a worker retiring at full retirement age is increasing to $3,345 per month in 2022 from $3,148 per month in 2021. If you already started receiving benefits but find that you can cover expenses by other means, you also have the option to suspend Social Security until age 70.
How it all fits together
The annual COLA increase is designed to help retirees keep up with inflation and for each of the past two years, benefits rose just 1.3 percent because inflation was a lot lower. This year’s COLA reflects that inflation this year has remained at its highest rate in more than a decade as price increases from pandemic-related labor and materials shortages are impacting the economy.
The Social Security Administration bases the cost-of-living adjustments on a formula that’s tied to the Consumer Price Index (CPI), which measures what consumers pay for goods and services. According to the latest data from the Bureau of Labor Statistics, the overall CPI has risen by 5.4 percent over the past 12 months. But even if inflation tapers off next year, the higher benefit may not be enough to offset the increases in medical costs, food, lodging and gas. In fact, Medicare Part B premiums, which many retirees have deducted from their Social Security checks, are expected to rise by more than 6 percent per month.
That’s why, even though Social Security is undeniably an important component of your retirement plan, setting up diverse savings and income streams is the best way to support yourself through your golden years.