The new year has brought new rules to Social Security. What do you need to know to get what’s coming to you?
Every year brings new changes and adjustments to the Social Security program, and this year is no exception. Changes for 2022 include a higher taxable wage cap and the biggest cost-of-living increase since the 1980s. What they don’t include, however, is an approved plan to protect the program for the future. In this blog I’ll cover the impact of today’s high inflation rate on Social Security; the importance of trying to maximize your benefits; and what may or may not be in store for your benefits in the future.
As you probably know, the Social Security you collect during retirement is income you earn by paying into the program throughout your working years. The total amount of your earnings subject to Social Security taxes is capped each year. But periodically, the government raises this cap to keep benefits aligned with inflation, which today is at a 30-year high. Partly in response to this, the Social Security wage cap has risen from $142,800 dollars last year to $147,000 dollars this year. From 2017 to this year, the Social Security wage cap has increased by nearly $20,000, or just over 15 percent. As a result of these increases, high-income workers have been paying that much more in Social Security taxes each year, and so have their employers.
But now let’s look at what today’s high inflation means for beneficiaries. What it means, quite simply, is the largest cost-of-living adjustment, or COLA, in 40 years. This year, more than 64 million people will see their benefits increase by almost six percent. That sounds good, but remember the current inflation rate is almost 7 percent, and it’s expected to go higher. So even with the big increase, Social Security still isn’t keeping pace with inflation. And historically it never has. The Senior Citizens League, an advocacy group, estimates that the average Social Security benefit has lost almost a third of its buying power since 2000. And it gets worse because even in a year with a high COLA, the increase is usually negated by increased premiums for Medicare Part B. For 2022, Medicare Part B premiums are set to rise by 14.5 percent, one of the biggest jumps in the program’s history. All of this highlights the importance of accurately trying to prepare for the long-term effects of inflation in your retirement income strategy. One of the keys to doing that is trying to maximize your Social Security benefits. That begins with the crucial decision of when to start taking your benefits.
As you probably know, you can start taking your Social Security benefits anytime between age 62 and 70. But to get your full benefits, you need to wait until at least your normal retirement age – or NRA – to start collecting. If you were born between 1937 and 1959, your NRA ranges between age 65 and 66-and-10 months. If you were born in 1960 or later, your NRA is age 67. The sooner you claim before your NRA, the more your benefits will be reduced. If you claim at age 62, the first year you are eligible, you will get just 75 percent of your benefits. Conversely, for every year you delay taking Social Security after your NRA, you’ll get an 8 percent increase per year in your benefits, topping out at age 70. Based on all this, it would seem the key to trying to maximize your benefits is a simple matter of waiting as long as possible to take them. The truth is, timing is only one important factor, and even that decision isn’t always as simple as it might seem. But it’s important to get it right when working to create a retirement plan that keeps pace with inflation and meets or exceeds your income needs. That goal may become even more important in the years ahead, and here’s why:
For decades, analysts have agreed that shoring up Social Security for the future probably requires drastic action. But so far, no action has been taken. Social Security benefits are paid from two trust funds: the Old-Age and Survivors Insurance fund – OASI – and the Disability Insurance fund. Both funds are expected to be depleted by 2034. That’s just 12 years away. According to the SSA’s 2021 annual report, retirement benefits will be paid on schedule until 2033. After that, if the fund is empty, only 76 percent of the scheduled benefits will be paid. To avoid all this, congress will need to make changes to replenish the fund. Increasing the Social Security tax cap periodically helps, but it won’t solve the projected shortfalls. Unfortunately, you don’t need me to tell you that counting on congress to agree on a solution to any problem these days seems like pure fantasy. Hopefully it happens, but the problem, itself, highlights a point I stress frequently: Today, more than ever, the responsibility of securing your financial future through reliable income, is up to you!
Investment Advisory Services offered through Sound Income Strategies, LLC, an SEC Registered Investment Advisory Firm. Arbor Financial Services of Florida, Inc. and Sound Income Strategies, LLC are not associated entities. Arbor Financial Services of Florida, Inc. is a franchisee of the Retirement Income Store. The Retirement Income Store and Sound Income Strategies LLC are associated entities.