The Social Security program is one that is constantly being improved upon. Although the fundamentals of Social Security do not change — you must pay taxes while you are working in order to be eligible for benefits after you stop working — the specifics are subject to change on a regular basis and frequently vary from one year to the next. This was the case in 2022, when a number of significant Social Security metrics were adjusted to reflect the rising rate of inflation.
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But what does it mean for you if you are getting close to retirement or if you have already started receiving benefits if these rules are changed? A look at some of the most significant facts regarding Social Security for the year 2022 is presented here.
In January 2022, the Cost-of-Living Adjustment was 5.9 percent higher than it was the previous year.
An annual cost-of-living adjustment is applied to benefits by the Social Security Administration (SSA) and is determined by comparing those benefits with the current rate of inflation. If the Social Security Administration (SSA) did not adjust the payments it makes to account for inflation, those payments would be virtually worthless today. A significant increase in benefits, amounting to 5.9 percent, will be provided to retirees beginning in January 2022 as a silver lining to the spike in inflation that occurred in 2021. This was the largest cost-of-living adjustment in four decades, surpassing the 7.4 percent increase that occurred in 1982. If the current patterns of inflationary pressure continue, the cost-of-living adjustment (COLA) for January 2023 may be even higher.
The wage base for Social Security was raised to a total of $147,000.
Payroll taxes collected from currently employed people are the primary source of revenue for Social Security. The OASDI tax that is withheld from your paycheck is broken down as follows: 6.2 percent goes toward Social Security, and 1.45 percent goes toward Medicare, for a combined total of 7.65 percent. If you are employed by someone else, that person is responsible for paying the additional 7.65 percent on your behalf; however, if you are self-employed, you are solely responsible for paying the full 15.3 percent. However, the so-called wage base, which increases on an annual basis in response to inflation, places a cap on the 6.2 percent that must be paid in Social Security taxes. For the year 2022, the Social Security tax will only apply to wages of up to $147,000.
The maximum amount of earnings that can be counted toward Social Security in 2022 is $19,560.
It is important not to confuse the wage base with the Social Security Earnings Limit because the latter refers to the maximum amount of money you can earn before having to start paying taxes on your benefits. Because the Social Security Administration views you as retired if you are receiving benefits, the amount of excess wages you continue to draw could have an effect on the amount of benefits you receive. However, this only applies to you if you are younger than the full retirement age of 67 years old, which is the current standard for the majority of workers. If you are younger than that, the Social Security Administration will reduce the amount of your benefit by one dollar for every two dollars that you earn that are in excess of the threshold for allowable earnings. If you are under the full retirement age and earn $29,560 per year, for instance, the amount of benefits you receive will be reduced by $5,000.
The calculation shifts solely for the year in which you reach the age at which you are entitled to full retirement benefits. Your Social Security benefits will be reduced by the Social Security Administration by $1 for every $3 that you earn over $51,960 in 2022.
However, you shouldn’t worry about missing out on those benefits because all that will happen is that they will be delayed. When you reach the age of full retirement, the Social Security Administration (SSA) will recalculate your benefit amount and give you credit for the months in which it reduced or withheld benefits because of your excess earnings. This credit will be applied retroactively.
The maximum amount that one can receive from Social Security in 2022 is $4,194.
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When determining benefits, only earnings up to the level of the Social Security wage base are taken into account. In other words, whether you earn $147,000 in 2022 or $10 million, you will pay the same amount of Social Security taxes and earn the same amount of credit toward your benefits. This is because the Social Security tax rate is based on a person’s average lifetime earnings. This also indicates that there is a maximum amount of money that can be received from Social Security, which for the year 2022 is $4,194. However, very few recipients actually qualify for the maximum benefit, as in order to do so, one would need to have earned the maximum wage base limit for a total of 35 years before beginning to collect benefits at the age of 70. The vast majority of people who are eligible for Social Security receive an amount that is much closer to the average benefit, which was $1,657.
One of the simplest ways to boost the amount of money you receive from Social Security is to delay filing for benefits until you are 70 years old. You will receive an additional 8 percentage points for each of those three years of waiting, up to a maximum of 24 percentage points if your full retirement age is 67, which it is for all workers who were born after the year 1960. When compared to the benefits you would earn if you filed for them earlier, at the age of 62, you will see a significant bump of approximately 77 percent if you wait until full retirement age to apply. Because individuals’ requirements and levels of financial capability vary, you should talk to a financial or tax advisor about the strategy you intend to use when filing your taxes. On the other hand, your monthly benefits will be permanently increased by a sizeable amount if you wait to file for them until you have the financial means to do so.
