2022 Social Security Benefit Increase
Written by: Vincenzo Testa, CPA
The Social Security Act was signed into law by President Roosevelt on August 14, 1935. It was created as a safety net for elderly, unemployed and Americans who are at a disadvantage. When an American worker receives a paycheck on their earned income, they pay a 6.2% tax directly from their wages that is allocated to the U.S. Social Security program. Employers in the United States also pay the Social Security Tax by matching all their employee’s contributions and this is otherwise known as Payroll Tax. In addition to this, self-employed individuals are required to pay employer and employee contributions on their net tax profits, otherwise known as the Self-Employment Tax.
Employers and employees have a maximum amount of taxable earnings in which they no longer are required to pay Social Security Tax. In 2022, employers and employees are not required to pay Social Security Tax on wages earned over $147,000. This maximum amount of taxable earnings increases slightly each year, which is administered by the IRS.
This article discusses:
- The history of social security
- How social security works
- The benefit increase announced Wednesday, October 13, 2021
What Happens When Taxpayers Receive Those Payments?
American taxpayers pay the Social Security Tax paycheck after paycheck throughout their entire career. Rightfully so, those same taxpayers are eligible to receive indefinite checks until death from the Social Security Administration when they reach Age 62 (if they elect to) for all of the contributions they have made to the program. The latest that an eligible taxpayer can elect to receive monthly benefits is at age 70. Each year that a taxpayer elects to defer the payments, their benefits will increase by 8%. We can think of these payments as a pension from the United States government funded strictly by the American taxpayer. When taxpayers elect to receive payments, federal tax and Medicare premiums will be automatically withheld from the payments if specified.
Cost-of-Living Adjustments (COLA)
Millions of Americans rely on Social Security benefits to pay their bills, but if their first payments from Social Security stayed consistent without increase throughout their lives, many most likely would not be able to fund their expenses. The SSA almost always increases Social Security payments that are in effect each year by something that they call a Cost-of-Living Adjustment, or COLA. The COLA helps account for the natural increase in prices of goods and services in the United States, usually due to healthy inflation caused by economic growth.
The chart below indicates the historic COLA adjustments made to Social Security all the way back to 1975. In recent years, the COLA adjustment remained relatively low apart from 2008, when benefits received a 5.8% increase. In regard to the 2008 adjustment, it was an outlier for COLA adjustments from 1991 until now. We all remember the Financial Crisis of 2008 and how similar it was to the COVID Economic Crisis; the economy was in a recession. In both crises, the Fed put policies in place to stimulate the economy and encourage spending by consumers. In both instances, this created a surplus of demand that significantly exceeded supply. When demand exceeds supply consistently across economic markets, this creates inflationary pressures on consumer goods and services.
The outlier adjustment of 5.8% in 2008 was to help account for that inflation caused by the economic stimulus. Social Security benefits in 2022 will now be receiving a similar COLA adjustment due to inflationary pressures. The Social Security Administration announced on October 13, 2021 that benefits will increase by 5.9% in 2022. This will be the largest increase in four decades. The last COLA adjustment of this size was in 1982, when the increase was 7.4%. This significant increase in 2022 are signs that the U.S. economy is living through inflationary times, whether they are transitory or long-term. We have all noticed the effects of inflation in the grocery store, at restaurants, when you are purchasing a vehicle or at the gas pump. The only question that remains unanswered is if and when these inflationary pressures will end.
If you have any questions regarding Social Security or other financial-related matters, please feel free to contact our team for a discussion.
Bouchey Financial Group has offices in Saratoga Springs and Troy, NY.
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