Since being signed into law in 1935, Social Security has been tasked with providing a financial foundation for our nation's retired workers. Today, more than 65 million Americans receives a monthly payout, approximately 72% of which are retired workers. Additionally, nearly 22 million recipients are pulled out of poverty each year as a result of the program.
But Social Security is also dynamic. Every October, the Social Security Administration (SSA) releases a fact sheet detailing all of the changes to expect in the upcoming year. This past week happened to feature that announcement.
Here's a look at the seven biggest changes to Social Security in 2022.
1. Beneficiaries are getting their biggest "raise" in nearly four decades
The headline change, and the one all 65 million-plus beneficiaries have been eager to hear, is that the cost-of-living adjustment (COLA) for 2022 came in at 5.9%. In English, this means all beneficiaries will see their monthly payout increase by 5.9% come January. According to the SSA, this is estimated to work out to a $92 monthly increase for the average retired worker to $1,657.
All told, this 5.9% "raise" is the biggest boost for Social Security recipients since 1983, and it's a reflection of the high levels of inflation being contended with by all Americans. Rapidly rising fuel costs, along with steady increases in food, shelter, and medical costs, are primarily responsible for this historic payout bump.
However, you'll note that I've purposely put "raise" in quotation marks. This is to reflect that COLA is a measure designed to keep beneficiaries on par with inflation and not help them "get ahead." The reality is that the purchasing power of Social Security income has been on a precipitous decline since 2000, and even next year's big monthly boost is liable to be offset by higher prices for goods and services.
2. The full retirement age is going up one last time
Back in 1983, the last major overhaul of the Social Security program was signed into law. The Amendments of 1983 introduced the taxation of benefits, gradually increased the payroll tax on all working Americans, and set forth a very staggered increase to the full retirement age (FRA) -- i.e. the age where a person becomes eligible to collect 100% of their monthly retirement benefit, as determined by their birth year.
Since Social Security's inception, there have only been 11 increases to the program's full retirement age. In 2022, we'll see the 12th and final increase of two months, which will lift the full retirement age from 66 years and 10 months for persons born in 1959 to 67 years for anyone born in 1960 or later.
Think of the full retirement age as your personal line in the sand. If you begin taking your retirement benefit at any point prior to hitting your FRA, you'll be accepting a permanent reduction to your monthly payout. Conversely, waiting until after your FRA to begin taking your retirement benefit can lift your monthly payout above 100%.
3. High earners will be paying more in taxes
Last year, the Social Security program collected just shy of $1.12 trillion in income. Approximately $1 trillion was the result of the 12.4% payroll tax on earned income (wages and salary, but not investment income).
This year, Social Security's payroll tax is applied to earned income ranging from $0.01 to $142,800. Any earned income above $142,800 is exempt from the payroll tax. But in 2022, the maximum taxable earnings cap is rising by $4,200 to $147,000. While most Americans aren't making $147,000 or more annually, it does mean high earners (about 6% of the workforce hits this taxable earnings cap) could be taxed up to an extra $520.80 in the upcoming year.
For those curious, this maximum taxable earnings cap isn't an arbitrary figure plucked out of thin air. Rather, it's based on the year-over-year increase in the National Average Wage Index (NAWI). The percentage increase in the maximum taxable earnings cap is commensurate with the percentage jump in the year-over-year NAWI.
4. The rich get richer: Maximum monthly payouts are increasing
Although high-earning workers will be paying more into Social Security next year, well-to-do retired workers also have the opportunity to collect a beefier monthly payout. In 2021, maximum monthly benefits at full retirement age were capped at $3,148. But in 2022, the maximum monthly payout for the rich is increasing by $197 a month to $3,345.
Keep in mind that it's not easy to net this maximum monthly payout from Social Security. Three criteria must be met to receive this monster benefit. Retirees would need to:
- Wait until their full retirement age to claim benefits.
- Work at least 35 years, since every year less of 35 worked results in a $0 being averaged into their monthly payout calculation.
- Perfectly hit or surpass the maximum taxable earnings cap for the 35 years the SSA uses to calculate their monthly payout.
5. Withholding thresholds for early filers are climbing
Working Americans might not realize it, but filing for retirement benefits before hitting full retirement age comes with some drawbacks. Aside from a permanently reduced monthly payout, it can also expose beneficiaries to the retirement earnings test. The retirement earnings test allows the SSA to withhold some or all of a beneficiaries' payout if they earn above predetermined income thresholds.
As an example, early filers who won't hit their full retirement age in 2021 can have $1 in benefits withheld for every $2 in earned income above $18,960 ($1,580/month). Meanwhile, early filers who will hit their FRA in 2021 are allowed to earn up to $50,520 ($4,210/month) before $1 in benefits can be withheld for every $3 in earned income above this threshold.
In 2022, both of these income threshold levels are increasing. Early filers who won't hit their FRA will be allowed to net $19,560 ($1,630/month) before benefit withholding kicks in. As for retired workers who will hit their FRA next year, the income threshold is rising to $51,960 ($4,330/month).
Keep in mind that the retirement earnings test no longer applies once a person hits their full retirement age.
6. Disability income thresholds are going up
Although more than three-quarters of all Social Security recipients are retired workers or the immediate family of retired workers, the program also doles out a monthly payout to 8 million disabled workers. Next year, disabled workers will be able to earn a little bit more each month without having their benefits stopped.
For instance, non-blind disabled workers were allowed to earn up $1,310 a month this year without having their benefits halted. In 2022, they'll be allowed to earn up to $1,350 a month, or an extra $480 in annual income, without a stoppage to their payout.
The year-over-year increase to the disability income threshold is even more nominally noticeable for persons who qualify as blind. Next year, disabled blind beneficiaries will be allowed to earn $2,260 per month without their benefits being stopped. That's $70 a month higher than 2021.
7. The bar to qualify for a retirement benefit has been raised
The seventh and final big Social Security change for 2022 is the raising of the bar for workers to qualify for a retirement benefit.
To receive a Social Security benefit, Americans must earn 40 lifetime work credits, of which a maximum four credits can be earned annually. These credits are awarded to workers based on their income in a given year.
This year, one lifetime work credit is awarded for every $1,470 in earned income. Since a maximum of four credits can be earned annually, $5,880 in qualifying income for 2021 will net the maximum (four) work credits. But in 2022, it'll take $1,510 in earned income to net a single work credit, or $6,040 in full-year earnings to net the maximum four credits.
Although the bar remains low to qualify for a Social Security retirement benefit, it has been steadily rising over the years.