By: Jerry Alena
On October 13, 2021, the Social Security Administration released the 2022 cost-of-living (COLA) increase. At 5.9% it is the largest single -year increase in 40 years.
The new OASDI Taxable Wage Base for 2022 was increased to $147,000 from $142,800.
Social Security serves over 70 million Americans. Increased payments to 8 million SSI beneficiaries will begin on December 31, 2021.
According to experts, this increase shows no sign of slowing down. As most Americans have noticed, prices are rising rapidly.
Federal Agencies Update Indices and Limits for 2022
Federal agencies announced their increases for 2022 in the fourth quarter. The IRS and DOL announced an increase in the limits for retirement plans and the Social Security Administration announced their annual cost-of-living increase, the greatest increase in over 30 years.
Retirement Plan Limits
Qualified Plan Participants (401(k), 403(b) and 457 plans) will be able to defer an additional $1,000 in 2022 – up to $20,500 for retirement. The catch-up provision, for participants that turn 50 or older in 2022, remains the same at $6,500 for 2022.
Other limits include:
| 415 Limit | $61,000 |
| Compensation | $305,000 |
| Highly Compensated | $135,000 |
| DB Limit | $245,000 |
If you include catch-up contributions, a participant can contribute up to 100% of pay or $67,500 between deferrals, match, and employer contributions in 2022.
SIMPLE Plan Participants will be able to defer an extra $500, up to $14,000 for their retirement. The SIMPLE catch-up provisions allow participants that turn 50 of older in 2022 to defer an extra $3,000. This number is also unchanged from 2021.
The IRS Limits can be found here:
https://www.irs.gov/pub/irs-tege/cola-table.pdf
Social Security
Social Security is the federal Old-Age, Survivors and Disability Insurance (OASDI) program created in 1933. It is the basic universal retirement plan for most Americans, covering 94% of all workers. State and local government workers are not covered by Social Security, but by pensions at the state and local level.
Social Security is funded by payroll taxes and a match by the employer. Under the Federal Insurance Contributions Act (FICA), contributions are paid into one of the two Social Security Trust Funds, Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI).
Payments to recipients are a function of actuarial assumptions of mortality and inflation. The trust funds are known as pay-as-you-go systems. Current taxes are used to pay current recipients.
COVID-19 Pandemic
According to the Wall Street Journal, experts had expected the significant mortality of COVID victims in pandemic to extend the break-even date for Social Security from 2034 to 20 35 or 2036. However, the magnitude of the recent COLA adjustment has moved the break-even date to 2033. Social Security refers to this as the depletion date.
Without legislative action, recipients will only receive 76% of promised benefits after the depletion date.
Planning Implications
Inflation has alarming implications for retirement plan participants and retirement planning overall. Traditionally, advisors and systems assume two to three percent inflation, and the new numbers are nearly twice that.
Advisors and participants would be well served to readjust their assumptions in their retirement planning models to avoid unpleasant surprises. Under the classic “Rule of 72,” 6% inflation will cut the spending power of a retiree’s account in half over 12 years.
As you go into year-end reviews, now is a great time to look at your account and update your assumptions for growth and inflation in your retirement and financial plans.
While the increased savings limits listed above will help, if inflation continues, they may not be enough for your client to maintain their lifestyle in retirement.
Planners may also want to account for decreased Social Security benefit starting in 2033 or earlier if inflation continues.
Plan Design
It may be prudent to set aside more money for retirement. Plan design updates such as cross-testing or adding a cash balance plan may help business owners concerned about saving more money and help assuage their inflation fears. Employees may want to consider increasing their contributions or adjusting their portfolios to account for the impact of inflation.
By the numbers
Maximum earnings subject to Social Security will increase to $147,000 (from $142,800).
Other limits can be found here:
2022 Social Security Changes – COLA Fact Sheet (ssa.gov)
Contact us today for a consultation
An inflationary environment poses challenges not seen in 40 years. Now is a good time to review your planning and contact us for a consultation.