What Employers Need to Know About the Social Security COLA Increase for 2022

The Social Security Cost-of-Living Adjustment (COLA) for 2022 is going up. Learn what the increase for 2022 means for retirees and workers.

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Illustration of the 2021 federal stimulus check from the IRS with cash and social security card

With the recent increase in inflation, the Social Security Administration has updated the cost-of-living adjustment (COLA) in October’s COLA notice. As a result, over 70 million Americans will receive a new benefit amount starting in January 2022.

For senior citizens and other SSI beneficiaries, this is a much-needed relief. According to the Senior Citizens League, the purchasing power for social security benefits has decreased by 30% since 2000.

But this isn’t just a shift of social security recipients. Businesses, employees, and those with disability insurance will want to know how their contributions will be affected. It’s also helpful to look at this increase in context to Medicare and general inflation, to help businesses adjust their payroll appropriately.

What is changing Social Security COLA 2022

The cost-of-living adjustment is now 5.9%, which is the highest it’s been since 1982.

Essentially, the cost-of-living adjustment is now 5.9%, which is the highest it’s been since 1982. In the next year, both social security benefits and payments will be affected. Specific changes include the following increases:

  • Maximum amount of earnings subject to the Social Security tax is now $147,000.
  • Earnings limit for workers will be $19,560.
  • Earnings limit of those considered to be at full retirement age is $51,960.

All beneficiaries should have received a COLA notice in their online portal.

The COLA increases are likely to provide some relief to retirees, who are coping with the price hikes. Social Security beneficiaries should be receiving an additional $59 for every $1,00 of benefits.

Veterans, those on disability, and disabled workers will also see an increase in their average monthly benefit.

On the flip side, it will now take workers $40 more, bringing the total to $1,510, to earn a single social security credit.

The adjusted Medicare Part B premium has not yet been announced, but it is likely that it will also see a slight increase. Medicare premiums are directly taken out of social security payments, so it’s important to keep in mind that any Medicare changes will also affect savings with the higher COLA payout.

What is staying the same

This notice will not affect the 2022 social security tax rate of 6.2% on employees and 12.4% for self-employed individuals. In addition, those who earn more than $200,000 if single, $250,000 if married, will pay an additional 0.9% Medicare tax.

How the COLA is calculated

Congress first instituted annual adjustments, what we know today as COLA, in the 1970s to account for regular rising inflation. To calculate the annual cost changes, the government uses the Consumer Price Index (CPI) to determine the rates of inflation.

In particular, they heavily rely on the CPI-W, which defines the wages of urban wage earners and clerical workers. This specific metric reviews the buying power of essential goods, such as the cost of food, housing, and transportation.

The Social Security Administration only updates the COLA and SSI benefits if the cost of these goods and services increases by at least 0.1%.

What a higher COLA means for payroll

While federal employees may end up with a pay raise, increasing wages for current workers is not mandatory. However, the cost of earning a social security credit has increased by $40. Without a raise, employees will receive a smaller paycheck despite the growing cost of expenses.

You may decide to add the COLA increase into your payroll system or at least match the smaller cost changes to stabilize employee salaries.

For many organizations, it’s common to simply negotiate a new salary with the employee, even without using the new COLA. Once you have a method to explain your adjustment and your employees have reviewed the changes, you can add special payroll codes into your current payment software to automatically add increases in pay based on inflation and higher costs of living.

To set up your specific cost-of-living system, you will need to know the employee’s base pay, location, time frame to consider, and the percentage increase during the chosen time period.

While it’s not mandatory, keeping employee salaries at pace with inflation not only supports your staff but also works as an excellent benefit to retain workers.

While it’s not mandatory, keeping employee salaries at pace with inflation not only supports your staff but also works as an excellent benefit to retain workers. More employees are job hopping post COVID-19 pandemic to boost their wages. And though businesses are still getting back on their feet, ensuring that employees aren’t losing out on their social security credits or making less due to wage stagnation, employee turnover is far more expensive.

Overall, the key takeaway for employers is that you may need to adjust your salary structure. This can be to adjust for inflation or to ensure employees meet a certain number of social security credits.

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