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People who collect Social Security are about to see bigger checks.
The Social Security Administration said Wednesday that the cost-of-living adjustment in 2022 would be 5.9%. The bump, which will help recipients keep up with rising costs due to inflation, is the largest increase in nearly 40 years.
The amendment would mean greater screenings of more than 70 million Americans. Nearly 8 million Americans will see Supplemental Security Income, or SSI, change on December 30, while about 64 million who receive Social Security will see the increase in January.
The 2022 or cost of living settlement will add about $92 a month to the average retirement benefit of $1,565 a month, according to some estimates.
“The cost-of-living adjustment is an automatic adjustment every year and it’s one of Social Security’s most important features,” said Nancy Altman, president of Social Security Works, an advocacy group focused on expanding benefits.
Here’s what recipients need to know about this year’s COLA.
What actions do you need to take?
People who already get Social Security don’t need to do anything to get the raise – checks will be adjusted automatically.
Before that happens, recipients may want to look at their monthly budgets and see if they can invest the extra money.
“They really need to look at the numbers and what this increase means for them, and what it will mean for their monthly checks,” said certified financial planner Diahann Lassus, managing director at Peapack Private Wealth Management, based in New Providence, New Jersey. She said getting extra money each month might help some people pay off debt or put a portion of it into an emergency provident fund.
“It’s kind of like when you work and you get a pay raise – can you do other things for yourself?” Lassus said.
Inflated, Medicare will undermine the adjustment
Surely people who get Social Security should understand that COLA isn’t necessarily meant for them to be able to spend more or have a bigger budget – it’s to keep their cost of living the same as prices rise due to inflation.
Right now, the prices of things like rent, gas, utilities, and food have gone up due to inflation.
Additionally, those who use Medicare or Medicaid likely won’t see a full 5.9% increase due to health care-related premiums. For example, high-level Medicare Part B hikes are scheduled for November. The most recent Medicare Trustees report estimates a $10 increase to Part B, bringing the monthly rate to $158.50 for 2022 from $148.50.
These payments are generally taken from Social Security and may affect the adjustment. However, there is a special rule called the tort clause that protects people from getting smaller Social Security checks because of Medicaid and Medicare.
“You might not get that much because of Medicare premiums,” Altman said. She added that after the premiums are announced, recipients must obtain a letter in December from the Social Security Administration outlining their 2022 checks.
Taxes may go up
If Social Security checks are your only income, there will be no change in taxes overall, according to Trinda Hackett, tax editor and technical tax editor at Thomson Reuters’ tax and accounting business.
However, if you are someone who relies on other retirement savings in addition to Social Security or you work and receive benefits, a portion of your paycheck may become taxable, depending on your other income.
“Taxpayers who receive other sources of income that exceed the threshold in addition to Social Security benefits should prepare to see an increase in their tax bill if their income is expected to exceed the basic amount,” she said..
To avoid any surprises that may come in tax time, it may be a good idea to check with a tax advisor now to make sure you know how the adjustment will affect your taxable income.
There may not be another major edit for some time
Just because there was a standard adjustment this year doesn’t mean people on Social Security should count on getting similar increases in the future.
In fact, a big jump in 2022 may indicate that there will be no major adjustments in the coming years. The last time there was a similar rise, of 5.8% in 2009, there were no adjustments for the next two years.
“People don’t have to say, OK, this is going to happen every year,” Altman said.
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