Is your Social Security payment about to see one of its biggest boosts in 30 years? Recent data from the federal government suggests the answer might be “yes.”
In the 1970s, an inflation adjustment — called a cost of living adjustment, or COLA — was added to the Social Security program to protect beneficiaries from increases in inflation.
The inflation adjustment is tied to the change in the federal government’s Consumer Price Index for All Urban Consumers. This is the index normally cited by the press in stories about inflation.
Annual Social Security inflation adjustments reflect the change in the index over a 12-month period ending in September. This means that Social Security beneficiaries will receive an increase in benefits in January 2022 that will be based on the change in the index through September 2021.
We still do not have data for September 2021, but we do have data through August 2021.
How big a Social Security increase can you expect?
The change in the index from September 2020 to August 2021 is already 4.94%. The increase between July and August was 0.3%. This was somewhat smaller than the increases in recent months.
If a similar increase is posted for this September, then the COLA increase for 2022 will be close to 5.3%, or about $80 per month for the average beneficiary.
This will be far larger than the 1.3% increase for 2021. Indeed, it will be one of the largest increases in benefits in the past three decades, exceeded only by the 5.8% increase in 2008 and the 5.4% increase in 1990.
But what does this mean for Social Security recipients? Will the COLA really protect beneficiaries against rising prices?
What a large Social Security COLA really means
The COLA does adjust beneficiary payments for past increases in prices, but beneficiaries will suffer a loss in buying power if prices continue to rise.
Indeed, since the increase in benefits in January 2022 will reflect only the period that ends in September 2021, it will reflect past inflation but not present inflation — and it will do so with a lag.
There is a fierce debate about whether the high rates of inflation we are presently experiencing are temporary. Some of the price increases we are seeing appear to be related to the uneven expansion of the economy as it comes out of the pandemic. It is too soon to know how these changes will affect the economy over a more extended period.
The bottom line
The smaller increase in the Consumer Price Index this past month may be an indication that the rate of increase is slowing. On the other hand, the large increase in producer prices (0.7%) this past month may indicate that prices will continue to rise.
If the inflation rate comes down, the benefits increase in January should really provide a boost to Social Security recipients. If prices continue to rise, the purchasing power of their benefits will be lower.
Regardless of what happens to inflation during the last part of this year, if you are paying for Medicare out of your Social Security benefit, the inflation adjustment for this year will not be fully reflected in your benefit check.
Instead, there will also be an upward adjustment in the Medicare premium that is subtracted from your benefit. This premium adjustment is based on the increased cost of the Medicare program.
It is too soon to know what the size of this adjustment will be, but higher medical expenses have not been a big factor in the rise of the CPI.
Russell Settle holds a doctorate in economics from the University of Wisconsin and taught economics at the University of Delaware for many years.
Jeff Miller holds a doctorate in economics from the University of Pennsylvania and taught economics at the University of Delaware for many years. Presently, he is teaching at Gallaudet University.
In 2009, Russell and Jeff co-founded SocialSecurityChoices.com, an internet company that provides advice on Social Security claiming decisions. You can learn more about that by clicking here.
Disclaimer: We strive to provide accurate information with regard to the subject matter covered. It is offered with the understanding that we are not offering legal, accounting, investment or other professional advice or services, and that the SSA alone makes all final determinations on your eligibility for benefits and the benefit amounts. Our advice on claiming strategies does not comprise a comprehensive financial plan. You should consult with your financial adviser regarding your individual situation.
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