Every year, the Social Security Administration reviews pertinent data to determine potential changes in the amount of monthly benefit payouts to recipients. In simple terms, these cost-of-living adjustments (COLA) are based on inflation. In January 2021, the Social Security Administration provided a 1.3 percent COLA. However, the cost of living this year has dramatically increased—largely due to the continued impacts of the coronavirus pandemic. Experts project the increase of Social Security COLA in 2022 may land somewhere between 4.5 to 6.1 percent according to AARP.
Why Such an Increase for the Social Security COLA in 2022?
The coronavirus pandemic has wreaked havoc in more ways than one. The American economy is still trying to catch up from losses due to business closures and safe-at-home mandates in place during the height of the pandemic. Even though many states have relaxed mandates in an effort to boost the economy, Americans face increasing prices of consumer goods and services. The humanitarian impact of covid has left both large corporations and small businesses across the globe short staffed and even shorter on income in many cases. This has made it increasingly hard for supplies to reach the renewed demand of consumers and has perpetuated a significant rise in costs of living, which drives inflation. As Business Insider reports, prices for consumers jumped 0.9 percent between May and June. And that is considerably higher than the estimated .05 percent rise that was initially anticipated.
Consumer Goods Are More Expensive, Driving Inflation Up
In May, AARP provided a list of things that have become more expensive during our recovery from the initial recession caused by coronavirus pandemic:
- Gas
- Oil
- Used cars
- Rental cars
- Houses
- Lumber
- Copper
- Airfares
- Hotel rooms
- Bacon
You can learn more by reading that AARP article here, but just a glance at that list is telling. In some way, Americans depend on every item (or derivatives thereof) included in that list. And even though bacon is singled out, many families are seeing prices on other groceries rise across the nation. For retirees on a fixed income, this can be worrisome, which is why an increase of Social Security COLA in 2022 is critical for many individuals.
Also, note that gasoline is first on that list. That is important, because here’s a fun fact: Gasoline prices play a large part in how the Social Security Administration determines COLAs. Here’s why: The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is used to calculate inflation that impacts Social Security benefits—and that index is largely subjective to the price of gas. As you may have heard (and surely noticed), the cost of gas is up more than 40 percent this year. For this reason alone, some experts feel we may see an increase in Social Security COLA of 6.2 percent or even higher. This is just an estimate, however. Any COLA increase is announced each October, as it’s typically based on price changes during July through September.
Will the COLA Increase be Enough?
This is a troubling question. You’d think that since the potential 2022 COLA increase is the highest we have seen in decades that it would be enough. However, along with goods and services, the cost of health care is rising, too. Those on Social Security who qualify are protected by a “hold harmless provision” that promises no reduction in Social Security benefit payment, even if Medicare Part B premiums increase. If you qualify, your Medicare B premiums are capped at the amount of the new COLA. This is a topic you should discuss with your financial advisor for complete details.
Keep in mind that even though your increase in Social Security COLA in 2022 means more money from your benefits—because the cost of living is on the rise, you must carefully budget accordingly. Don’t expect an influx of rainy-day change in your pocket. Those extra dollars will be spent on your daily goods and services, as well as potential health care costs. You’ll also want to calculate potential federal and state tax on Social Security benefits, which your financial advisor can help you navigate.
It’s important to review your overall financial planning in retirement to budget for these expenditures. You want to achieve and maintain security, and prudent, innovative strategies can help you do so.
Last year, we published an article, Strategies to Prepare for Potential Cuts of Social Security Benefits. While the information in that article was geared towards cuts in benefits, it includes certain steps that may be appropriate in helping you balance the current increase in inflation with the projected increase in benefits we are anticipating today.
This article was written for general information purposes only and should not in any way be construed as financial or legal advice. Please consult with your financial or tax professional for appropriate guidance regarding this subject.