How Much Will Benefits Increase Next Year?
Social Security COLA 2022: How Much Will Benefits Increase Next Year?
Due to rising inflation, beneficiaries could get their biggest raise in over a decade
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En español | Social Security beneficiaries could get a 5 percent cost-of-living adjustment (COLA) in 2022, the highest since 2008, due to the recent burst of inflation.
"The COLA will no doubt be higher than it has been for the last decade, probably in the 5 percent or higher neighborhood because of rising prices,” says David Certner, legislative counsel and director of legislative policy for government affairs at AARP.
Any estimates are preliminary, and the actual COLA will depend on changes in prices between July and the end of September. The Social Security Administration typically announces the amount of the annual adjustment, if any, in October. The increase in benefits typically goes into effect in January.
Rising prices
Estimates for the 2022 COLA range from 4.5 percent from Moody's Analytics to 6.1 percent from The Senior Citizens League. Economist Bill McBride, who writes the finance and economics blog Calculated Risk, estimates the 2022 COLA at 5.5 percent.
In contrast, the increase that went into effect in January 2021 was 1.3 percent, or an average of about $20 a month for individuals. A 5 percent increase would boost the average monthly benefit by about $77.
Rising prices in 2021 are the driving force behind the higher COLA estimates. “It's the energy prices that are causing havoc,” says Mary Johnson, Social Security and Medicare policy analyst for The Senior Citizens League. A gallon of unleaded gasoline costs an average of $3.16, up from around $2.20 a year earlier. Oil demand collapsed last year at the onset of the pandemic, and it takes time to ramp up production again. Now, with businesses reopening and people traveling more, demand is growing. Supply just hasn't caught up yet.
"Higher prices reflect the disarray caused by the pandemic,” says Mark Zandi, chief economist at Moody's Analytics. The price of airline tickets, for example, has surged 24.6 percent in the past 12 months ending June 30, as travelers scramble to get seats on flights that had been cut back by COVID-19 restrictions. Used car prices have jumped 45.2 percent in the past year, because the supply of new cars fell sharply during the pandemic. Zandi expects the inflation rate will decline to about 2 percent in 2022 as supply and demand even out.
Nevertheless, higher prices take a significant toll on retirees. Social Security benefits rise only once a year; inflation rose 1.1 percent in June alone. “Those with modest Social Security benefits are the ones who really have trouble,” Johnson says. Other retirees have had to tap more of their savings than they had planned because the Social Security benefit didn't keep up with 2021's hot inflation, she says.
How the COLA is calculated
The actual COLA will depend on the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W, an official measure of the monthly price change in a market basket of goods and services, including food, energy and medical care. The Bureau of Labor Statistics tracks both the CPI-W and its better-known cousin, the CPI-U — the Consumer Price Index for All Urban Consumers — which is a broader measure of retail prices.
The CPI-W rose 6.1 percent over the 12 months ended in June. In October, the Social Security Administration will compare the CPI-W for July, August and September 2021 with the CPI-W for the same period in 2020. The percentage change from last year's third quarter to this year's third quarter will be the COLA amount for the following year.
The COLAs for the past 10 years have averaged 1.7 percent, with increases ranging from zero in 2015 to 3.6 percent in 2011. The most recent year beneficiaries received a COLA of more than 5 percent was in 2008, when there was 5.8 percent increase.
Since Congress initiated automatic annual COLAs in 1975, there have been three years — 2009, 2010 and 2015 — in which benefits didn't increase at all. There is no COLA if inflation stays the same or declines year-over-year. The single biggest increase was 14.3 percent in 1980, which went into effect in January 1981.
History of Social Security COLA Increases, 1975-2020
Cost-of-living adjustments go into effect in January of the following year. Social Security publishes a complete chart of annual COLA increases.
Social Security is funded by a payroll tax of 12.4 percent on eligible wages — employees pay 6.2 percent and employers pay the other 6.2 percent (self-employed workers pay the entire 12.4 percent). Next year, the maximum amount of earnings subject to the Social Security tax, currently capped at $142,800, will also be adjusted for inflation. The money paid in by today's workers goes to cover current benefits, with any excess going into the Social Security trust fund.
You might not see all of the increase in your benefit payment. If your Medicare Part B premiums are deducted from your Social Security (as is the case with 70 percent of Part B enrollees), a Medicare rate increase could offset all or part of the COLA.
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