2022 Social Security COLA Announced
Last week, the Social Security Administration announced that next year’s cost-of-living adjustment, or COLA, will be 5.9% compared to the 1.3% increase for 2021. For the average benefit, the increase translates to roughly +$92 per monthly check bringing the total amount to $1,657 for 2022.
How is the COLA calculated? The administration uses the Consumer Price Index for Urban Wage Earners, also known as CPI-W, and compares the average changes between July, August and September of the previous year to those same three months of the current year. The percentage change from one year to the next determines the COLA adjustment.
The year-over-year change reflects a dramatic increase in economic activity in 2021 when compared to the prior summer in 2022 when COVID-19 was still relatively new, its implications were unknown and there were no vaccines yet. The resulting increase in demand for goods and services following the roll-out of vaccines has raised prices while producers and suppliers continue in their attempts to catch up.
Although the 5.9% COLA adjustment may seem like a dramatic increase, most retirees need to factor in the increase in Medicare Part B premiums as well given that monthly Medicare Part B premiums are typically deducted directly from monthly Social Security benefit checks. The greater a taxpayer’s Modified Adjusted Gross Income (MAGI) is, the greater their Medicare premium may be – from the $148.50/month base premium in 2021 up to $500+/month for high earners.
Medicare has not announced 2022 Part B premium increases, but what we have been hearing is that the base monthly premium of $148.50 for 2021 may increase to $158 for 2022, which reflects a roughly 6% increase similar to the Social Security COLA increase.
Under the federal “hold harmless” provision, the majority of Social Security recipients have to pay a portion of Part B premium annual premium increases as long as it doesn’t result in their receiving a lower monthly Social Security payment. For those who are “held harmless” (which is most Social Security recipients), you can’t end up with less, but it’s possible to have the entire COLA wiped out by increased Medicare Part B premiums.
For those who are still working, the administration also announced that the maximum amount of earnings subject to Social Security tax will increase to $147,000 in 2022 from $142,800 in 2021.
We can’t end without mentioning rising inflation again, which remains a hot topic in every news outlet and is an important issue in retirement given that it is something that we cannot control.
As mentioned above, economic activity prior to vaccines being approved and announced was a lot lower than after and the “pent-up demand” to do things and buy things created a dramatic increase in economic activity. This leads a lot of economists to view the recent increase in prices as “transitory” given that the lower of level of activity in 2020 (the “base effect”) will drop from the calculation next year. As a result, the COLA increase for 2022 is likely to be an anomaly and not repeated in subsequent years. For some context, the average Social Security COLA for the last 10 years was 1.9% and for the last 20 years, it was 2.2%.
But the recent announcement creates an opportunity to reconsider issues like:
- How will COLA adjustments affect my future expenses?
- Will I outlive my money?
- Am I leaving money on the table/could I be spending more?
As always, if you have questions or concerns, please reach out to your ACM Wealth Advisor.
Sources: https://www.ssa.gov/cola/, https://www.ssa.gov/OACT/COLA/colaseries.html
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