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The Social Security Administration recently announced that COLA (Cost-of-Living Adjustment) will increase by 5.9% in January 2022. This is the largest increase since July 1982. But what is COLA?

Social Security Benefits
Receive 5.9% Cost of Living Adjustment

COLA is an adjustment to the Social Security and Supplemental Security Income (SSI) benefits that are being paid out to approximately 70 million Americans. We will take a closer look at COLA and its significance, and what effect does the change in COLA have on you as a taxpayer.

In 1972 the law was changed to provide for automatic annual cost-of-living allowances based on the annual increase in consumer prices. Beneficiaries of the SSI had to wait on the action from Congress to receive a benefit increase before the 1972 legislation. This change simplifies the adjustment and does not allow the effect of inflation to take hold on the benefit payments.

The automatic annual cost-of-living allowance is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If there is no increase in the CPI-W, there can be no COLA increases.

The significance of COLA is that it ensures that the purchasing power of the SSI benefits is not being reduced by inflation. While a 5.9% benefit increase looks good on paper, it is important to note that it is not additional income. It is the minimum amount needed to maintain the purchasing power the beneficiaries had all along.

The beneficiaries also have to account for Medicare Part B premiums and taxes that reduce the value of the COLA increase for many. The Medicare Part B premiums increase on a yearly basis that seniors pay for physician and outpatient services. The premium paid depends largely on the beneficiary’s income. The adjustment for inflation is consequently being eroded by the increase in Medicare premiums and cannot keep up fast enough with the inflation. If you are on Medicare, you will not get your 2022 Social Security benefit amount until the official Medicare premiums are announced. You can check in December if you have an online social security account.

The social security tax funds the social security program in the United States. Working taxpayers are funding the benefits of the existing beneficiaries. Ideally, those working taxpayers will eventually retire and qualify for SSI benefits that are funded by current workers.
The tax has two parts. The first is the payroll tax (FICA) and the self-employment tax (SECA). The Medicare tax makes up the second part. Payroll taxes are based on an employee’s net wages, salaries and tips that are typically withheld by an employer and forwarded to the government. In 2022, the social security tax is 6.2% for the employer and 6.2% for the employee.

Self-employed taxpayers pay Social Security taxes as part of the quarterly estimated taxes to the Internal Revenue Service (IRS). These taxpayers pay the full 12.4% since they are considered both the employee and employer. Fortunately, the IRS allows self-employed individuals to deduct the employer portion of self-employment taxes from their taxable income.

The social security tax rate rarely changes – employees have been paying 6.2% since 1990. However, unlike the tax rate, the Social Security tax limit is adjusted annually due to COLA to keep Social Security benefits on track with current inflation. The maximum amount of earnings subject to Social Security Tax will rise 2.9% from $142,800 in 2021 to $147,000 in 2022. Any income earned beyond the wage cap is not subject to a 6.2% social security payroll tax. However, there is no wage base limit for Medicare tax. The cost of adjusting COLA falls mainly on about 12 million high-earning workers.

If you have any questions regarding the Social Security benefits or taxes related to it, please contact RVG & Company to discuss this issue at 954.233.1767.