Due to the pandemic and various supply chain bottlenecks around the world, the cost of many consumer goods and services has increased greatly. While many influential voices argue that inflation is transitory and will soon drop down to a comfortable level again, many other are worried that wages are stagnant and that the cost of living is quite removed from earning potentials.
One big worry that many from older generations have revolves around social security and how the current inflation readings affect it. The main questions revolve around increases in social security benefits and in turn, the increase in social security taxes.
Recently, the Social Security Administration released their fact sheet for 2022. This fact sheet goes into detail about the new changes to social security changes slotted for the near future. The main headliners from this fact sheet include a 2.9% rise in the top level of social security taxes and a larger 5.9% growth in social security benefits in the next year.
What this means in terms of social security taxes is that many more people will have to start paying even more in taxes in 2022. This year, only the first $142,800 that an individual earns will be included in social security tax calculations. Next year, this maximum income limit increases to $147,000. For a lot of people, this makes no difference. For the roughly twelve million individuals that have higher reported taxable earnings, this means more will be taken out for taxes.
This hits especially deep for self employed workers as they usually have to pay much higher taxes than individuals working for an employer. This is because the employer normally pays half of their employees social security taxes each year. While this is not a very well known fact, you can see that if you have an employer they are paying half of your social security taxes which leaves the employee with a much smaller 6.2% social security tax rate.
On the other side of social security, benefits will increase on average around 5.9% next year. This is directly related to the rise in inflation we have been experiencing in the past year. While social security benefits are different for each individual, this means that on average, social security benefits will $92 higher per month.
Should you change your spending or saving habits to reflect changes in social security?
So social security benefits are increasing but how does that affect you if you are not at an age where you are receiving social security yet? For everyone that is not receiving social security, it is important to realize that social security benefits change almost every single year. The further you are from receiving social security, the more uncertainty you should plan into your saving and spending goals. The very extreme of this is to not factor in social security at all into your retirement plans. This might seem way too conservative but it is the route that many prefer in preparing for a stress free and stable retirement.
For those that are already receiving social security, the increase in benefits might seem like a great thing. Unfortunately, while you might receive more social security benefits, it does not necessarily mean you should be changing the way you spend. Since social security benefits are tied to cost of living adjustments, the buying power that you have likely has not changed by very much.
It has been quite a while since social security benefits have increased by such a large percentage but as always, the benefits are calculated with cost of living adjustments in mind. To put this into perspective, the last time social security had grown this much was more than a decade ago around 2009 when social security increased by 5.8% in a single year.