Although Social Security has been around for years, the program keeps changing. But some of those changes may be less obvious than others. Here are a few ways the program changed in 2021 -- and how they might affect you.
1. Benefits are higher this year
Each year, Social Security recipients are entitled to a cost-of-living adjustment, or COLA. COLAs are based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the index shows an uptick in the cost of common goods and services, benefits get raised.
In 2021, seniors on Social Security saw their benefits go up by 1.3%. For context, in 2012, seniors got a much larger raise -- 3.6%. In 2016, however, they got no raise at all.
Next year, however, the COLA seniors receive is expected to be far more generous than it's been over the past couple of years. That's because the rate of inflation has already increased substantially -- something you may have noticed when you buy food at the grocery store or fill up gas at the pump.
We won't know what 2022's COLA will look like until third-quarter data from the CPI-W becomes available. But based on what we know now, it's fair to assume that it'll put 2021's COLA to shame.
2. Workers pay taxes on more of their earnings
Social Security is funded heavily by payroll taxes. But workers don't pay taxes on all of their earnings. Rather, there's a wage cap that changes from year to year which dictates how much income is taxable.
In 2020, workers paid taxes on their first $137,700 of earnings. In 2021, that threshold rose to $142,800. Lower-income households may be completely unaware of this change, since it doesn't affect them. But higher earners are losing a larger portion of their income.
3. It takes higher earnings to qualify for benefits
To qualify for Social Security benefits in retirement, you need to earn 40 work credits in your lifetime. Each year, there's a value assigned to those credits. In 2020, it was $1,140. But in 2021, that value increased to $1,470. What this means is that it's getting harder to earn work credits for Social Security purposes, especially if you only work on a part-time basis.
Another thing you should know is that you can only earn a maximum of four work credits per year. But that's not a new rule.
Know your Social Security details
There's a good chance Social Security will end up being an important source of income for you once you retire, and so it's important to stay informed of changes to the program. Keeping tabs on those changes might also help you better manage your money. For example, if you earn a high enough income to be affected by a rising wage cap, that's the sort of thing you should plan for.
Even if retirement is many years away, it pays to read up on how Social Security works. Understanding its nuances will put you in a better position to make the most of it when the time comes.