The following article provides a discussion and update on the Cost of Living Adjustment (COLA) over the last few years. The COLA figure is critical for millions of Americas, especially retirees whose social security benefit raise is tied to the COLA increase. So the larger the COLA increase the larger the increase in benefits for social security recipients.
Covered in this Article:
COLA Calculation and Final Increase
The COLA increase is based on the percentage increase (if any) in the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the current year over the average for the third quarter of the previous year in which a COLA became effective.
The government, via the BLS and SSA, publishes the official annual cost-of-living adjustments typically in late October, with changes to social security, retiree benefits and medicare effective for the subsequent year.
2022 COLA projected Increase
With inflation (CPI) running much higher than in past years, seniors and retirees should see a nice boost to their social security benefits in 2022. Forecasters and publications like the Kiplinger letter and Senior Citizens league are predicting a 4.3% to 5.4% COLA increase in 2022. This will likely be the largest increase since 2008, which saw a 5.8% COLA hike. It is also over three times the 2021 COLA increase.
See the table below for other items impacted by the COLA adjustment and other projected year-over-year changes
The final number is still subject to change as inflation could change between now and October 2021, when the final COLA adjustment figure is published by the SSA. I will update that here when available and you can stay connected via the following options.
Social Security Item
|Increase over previous year||4.5%||1.3%||1.6%||2.8%|
|Maximum taxable earnings (wage base) subject to social security taxes||$145,850||$142,800||137,700||$132,900|
|Maximum social security benefit (per month)||$3,386||$3,148||$3,011||$2,861|
|Estimated average monthly social security benefit (all workers)||$1,589||$1,543||$1,503||$1,459|
|Self-Employed social security tax rate||15.30%||15.30%||15.30%||15.30%|
|Employee social security tax rate (deducted from your paycheck)||7.65%||7.65%||7.65%||7.65%|
2019 to 2021 COLA increases
The Social Security Administration (SSA) officially confirmed a 1.3% COLA increase in 2021. For the average retiree that is a $20 raise from 2020 levels ($1,523 p/month). The 1.3% COLA is the smallest since 2017 and slightly below the 1.4% average over the past decade. See the table above for other items impacted by the COLA adjustment and other year-over-year changes
Other notable items
- The maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $142,800. Above this income limit, no SS taxes will be levied
- The maximum SS benefit goes to $3,148, with the average (across all workers) forecasted to rise to $1,543.
- No change to the social security tax rates
The COLA increase is based on the percentage increase (if any) in the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the current year over the average for the third quarter of the previous year in which a COLA became effective. The government, via the BLS, publishes the official annual cost-of-living adjustments typically in late October, with changes to social security, retiree benefits and medicare effective for the subsequent year.
The social security tax rate above is the combined rate for Social Security and Medicare. For employees the employer pays half the social security tax, whereas for self employed they have to pay both the employee and employer components and hence the higher tax rate.
Once a worker passes the maximum taxable earnings (or social security wage base) then all earnings above that amount are NOT subject to social security taxes.
2018 COLA Increase – 2%
The Social Security Administration (SSA) has announced a relatively large 2% Cost of Living Adjustment (COLA) for 2018. Benefits like Social Security or Supplemental Security income, that are tied to COLA will reflect the 2% increase in January 2018. The increase is equivalent to about $27 more a month or $329 a year for the average retired worker getting social security payments.
Based on 2% increase, the maximum amount of earnings subject to the Social Security tax (taxable maximum) has also increased to $128,700. This will result in approximately 7% to 8% of workers (~12 million people) paying more in Social Security taxes in 2018.
2017 COLA Increase – 0.3%
Despite fears that there would not be a Cost of Living Adjustment (COLA) increase in 2017, the Social Security Administration (SSA) announced that benefits will in fact increase by 0.3% in January 2017. Over 65 million Americans who receive Social Security benefits or Supplemental Security Income payments will benefit from this increase. This is following a year (2016) where no increase was provided. The table below shows recent COLA changes and associated updates.
[2016 COLA update] As expected the 2016 Cost of living adjustment (COLA) was 0%, meaning that no changes to your social security taxes and benefits next year. Details over 2015 levels are shown in the table below.
*A decrease in full maximum benefits occurs when there is no COLA, but there is an increase in the national average wage index.
The Social Social Administration (SSA) announced a 1.7 percent cost of living adjustment (COLA) for 2015 (vs 1.5% in 2014). As a result the following changes, shown in the table above, to your social security taxes and income will result. All changes will take effect in January.
The main impact to tax payers will be an increase in earnings subject to the Social Security tax , which increase to $118,500 from $117,000 in 2014. The SSA estimates that this will impact 8% or 10 million off the approximately 165 million workers who will pay Social Security taxes.
Source: Social Security Administration (socialsecurity.gov)