There’s good and bad news on the horizon for Social Security in 2022.
First, the good news: Next year, benefits will increase by 5.9%, the biggest annual cost-of-living increase in 40 years.
And people who turn 62 in 2022 — meaning they are newly eligible for Social Security — have two things to cheer about. The 5.9% COLA will be factored into their future benefits even if they don’t claim benefits until later. And those newly eligible beneficiaries, who were born in 1960, can expect an increase in their future benefits based on an increase in the latest average wage index rather than the previously forecast decline.
Social Security benefits are based on a complicated formula that adjusts a worker’s top 35 years of career earnings to changes in the average wage index up through age 60. Such indexing ensures that a worker’s future benefits reflect the general rise in the standard of living that occurred during his or her working life.
For people who turn 62 in 2022, the Social Security Administration uses 2020 — the year they turned 60 — as the indexing year. The national average wage index increase 2.83% in 2020 over the previous year.
But back in the early days of the COVID pandemic, when millions of people were suddenly unemployed, it looked as if the average wage index for 2020 would decline for only the second time since 1951.
A percentage change in the average wage index in the year a worker turns 60 has a nearly one-on-one impact on the Social Security benefit formula. At one point, it looked as though the future benefits for those born in 1960 could have dropped between 10% and 15% from those of people born one year earlier. But the drop never materialized. Crisis averted.
Now for the bad news.
Much of the 5.9% annual increase in Social Security benefits will be offset by higher Medicare premiums, which are usually deducted directly from monthly benefits. Monthly premiums for Medicare Part B, which covers doctors’ fees and outpatient services, will increase to $170.10 in 2022, up 14.5% from the 2021 premium of $148.50 per month.
Higher-income retirees subject to income-related monthly adjustment amounts or IRMAAs will pay even more, ranging from an extra $68 to an extra $408.20 per month per person. Medicare Part D prescription drug premiums are also subject to separate monthly high-income surcharges.
Finally, the long-term financial outlook for the Social Security reserves continues to deteriorate, according to the latest trustees’ report, with the combined Social Security Old Age, Disability and Survivors trust funds expected to be depleted by 2034 — one year earlier than previously forecast.
(Questions about Social Security rules? Find the answers in Mary Beth Franklin’s 2021 ebook at MaximizingSocialSecurityBenefits.com.)
Andrew is half-human, half-gamer. He’s also a science fiction author writing for BleeBot.