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The Social Security cost-of-living adjustment for 2022 will be potentially the largest in 40 years.
Estimates indicate that the annual increase could be 6.2%, driven by rising inflation.
But rising prices on grocery store shelves and gas pumps aren’t the only reasons why these larger monthly profit controls probably won’t go that far.
The Social Security cost-of-living adjustment is calculated each year using the consumer price index for urban wage earners and office workers, also known as CPI-W. The calculation for 2022 will be based on third quarter data.
While people may think a roughly 6% profit increase is good news, it’s important to remember that it’s not necessarily additional income, said Patrick Hubbard, an associate researcher at Boston College’s Center for Retirement Research.
“Everything is 6% more expensive these days and it’s just the bare minimum needed to maintain the purchasing power you’ve had all the time,” Hubbard said.
In addition, two other items, Medicare Part B premiums and taxes, would likely reduce the value of this increase for many, according to a study by the Center for Retirement Research.
Medicare Part B premiums.
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While the cost-of-living adjustment tends to increase each year, Medicare Part B premiums paid by seniors for medical and outpatient services also increase. Part B premium payments are usually deducted directly from the monthly benefit checks of Social Security beneficiaries.
Exactly what someone pays for Medicare Part B depends on their income. In 2021, the monthly premium is $ 148.50 for singles with incomes of up to $ 88,000 and married couples for up to $ 176,000. But these monthly premiums can be as high as $ 504.90 a month for people on high incomes.
From 2000 to 2020, Social Security benefits increased by an average annual increase of 2.2%, while Medicare Part B premiums increased by 5.9%.
According to the Center for Retirement Research, in a single year, the reduction in benefits due to Medicare Part B premiums may be minimal. But over time, that is likely to change.
For example, in 30 years, the average total profit could hypothetically grow by 89%, to $ 3,600, compared to $ 1,900, according to calculations by the Center for Retirement Research. But including Medicare Part B premiums, net benefits would increase by only 60%, to $ 2,800, from $ 1,750.
“There’s this increase in benefit, but because it’s eroded by Medicare premiums, it’s not very fast enough to keep up with what inflation would be,” Hubbard said.
It should be noted that a rule called a harmless withholding provision protects many Social Security beneficiaries from reducing their benefit payments because of higher Medicare premiums.
Income taxes
Social Security income is subject to federal income taxes for certain beneficiaries.
People with less than $ 25,000 in combined income or married couples with less than $ 32,000 do not have to pay taxes on their benefits. Combined income is calculated by adding adjusted gross income, non-taxable interest income, and half of Social Security benefits.
Social Security beneficiaries who exceed the combined income thresholds pay taxes of up to 85% of their benefits.
These tax thresholds do not adjust to wage or price growth. As a result, more beneficiaries are taxed on their benefits over time, the Retirement Research Center notes.
In 1983, 8% of eligible families paid taxes on their benefits. Today it is estimated that 56% of beneficiary families pay these taxes.
It is expected to increase to 58% by 2030. But if rising inflation leads to higher annual profit adjustments, more families will pay taxes on their profits as a result, reducing net profit.
“Inflation protection is good and necessary and helps many retirees,” Hubbard said.
“But it’s also a double-edged sword, as it doesn’t necessarily provide as much protection against inflation or as much additional revenue as one might initially think because of this tax issue,” he said.