Inflation, Medicare, Taxes Affect Social Security Income in 2022 – Community News
Social Security

Inflation, Medicare, Taxes Affect Social Security Income in 2022

Medicare Part B premiums

While the cost of living adjustment usually rises each year, so do the Medicare Part B premiums that older Americans pay for doctors and outpatient services.

By 2022, the standard Medicare Part B premium will rise to $170.10, well above the estimated $158.50.

The record 14.5% increase was driven by several factors, including higher prices.

Part B premium payments are often deducted directly from Social Security beneficiaries’ monthly benefit checks.

Exactly how much a person pays for Medicare Part B depends on their income.

In 2022, the monthly premium will be $170.10 for singles with incomes up to $91,000 and married couples up to $182,000. But those monthly rates can go as high as $578.30 per month for high-income earners.

From 2000 to 2020, Social Security benefits grew an average of 2.2% per year, while Medicare Part B premiums increased 5.9%.

In a single year, the effect of Medicare Part B premiums can be minimal, according to the Center for Retirement Research. But over time it gets wider.

There’s an increase in benefit, but because it’s being eroded by Medicare premiums, it’s not nearly fast enough to keep up with inflation.

Patrick Hubbard

research associate at Boston College’s Center for Retirement Research

For example, in 30 years, the average total Social Security benefit could hypothetically grow by 89% — to $3,600, up from $1,900, according to the calculations of the Center for Retirement Research. But once Medicare Part B premiums are included, net benefits would increase by just 60% — to $2,800, from $1,750.

“There’s an increase in benefit, but because it’s being eroded by Medicare premiums, it’s not nearly fast enough to keep up with inflation,” said Patrick Hubbard, research associate at the Center for Retirement Research.

Note that a rule called the indemnity provision protects many Social Security beneficiaries from having their benefits reduced as a result of higher Medicare premiums.

Income taxes

Social Security income is subject to federal income taxes for certain beneficiaries.

Individuals with a combined income of less than $25,000 — or married couples with less than $32,000 — are not required to pay taxes on their distributions. Combined income is calculated by adding adjusted gross income, non-taxable interest income, and half of Social Security benefits.

Social Security beneficiaries who are above these combined income thresholds pay tax on up to 85% of their benefits.

Those tax thresholds are not adjusted for wage or price growth. As a result, more beneficiaries are taxed on their benefits over time, the Center for Retirement Research says.

In 1983, 8% of eligible families paid tax on their benefits. Today, an estimated 56% of beneficiary families pay these taxes.

That is expected to increase to 58% by 2030. However, if rising inflation leads to higher annual benefit adjustments, more families will pay tax on their benefits, resulting in a lower net benefit.

“Inflation protection is good and necessary, and it helps many retirees,” Hubbard said.

“But [it] is also a bit of a double-edged sword in that it doesn’t necessarily offer as much inflation protection or as much additional income as one might initially think because of this tax issue,” he said.