WASHINGTON — Inflation is likely to cause a significant increase in Social Security’s annual cost of living adjustment (COLA) for 2022. Wednesday morning will reveal the exact amount after the Labor Department’s September inflation report, which is a data point in the final calculation.
The Social Security COLA has been increasing at an average of 1.7% per year over the past 10 years as inflation has remained low. However, the coronavirus pandemic’s economic recovery has led to rising prices for many goods and services. This is expected to result in larger checks for retirees.
WHY IS SOCIAL SECURITY BENEFITS ADDED?
The COLA is designed to protect the purchasing power of Social Security benefits and should not be viewed as a pay increase for retirees, according to policymakers.
Inflation increases were once approved by Congress. However, Congress gave that responsibility over to non-partisan experts in the government bureaucracy starting in the mid-1970s. The inflation official measure is used to determine the annual review. This means that it proceeds automatically without any political brinksmanship.
The Great Recession saw a 5.8% COLA increase for 2009. Next year’s number may be even higher.
According to government economists, a COLA of between 6% and 7% was predicted this summer. It would be the largest Social Security increase that the vast majority baby boomer retirees had ever seen. They’ve received modest to minimal annual adjustments up to now. This does not include three years where there was no COLA as inflation barely showed any pulse.
A 6% COLA would bring the average Social Security payment to a retired worker up to $93 per month and to $1,636 next fiscal year. This is compared to next year’s COLA which is only $20 per month.
WHAT HAS CHANGED IN THE PAST YEAR?
Prices are climbing at an impressive rate as the economy recovers after the shock caused by coronavirus shut downs.
As a reminder, gas costs more than $3 per gallon in most US states and $4 in Hawaii. Food prices had been rising, and labor costs are also increasing as employers try to attract more skilled workers who want better pay and benefits. You can also add to this mix supply chain issues that have slowed deliveries for everything, from running shoes to refrigerators.
All this information is incorporated into the price consumers pay for everyday necessities.
The COLA has a significant impact on the economy.
It has a significant impact on the household budgets for about 1 in 5 Americans. This includes Social Security recipients and federal retirees.
Half of seniors live in households where Social Security payments account for at least half of their income. One-quarter of them rely on their monthly payment to cover all or almost all of their earnings. The COLA can make a huge difference for this group.
PRIVATE PENSIONS CAN ALSO PROVIDE A COLA
Social Security’s benefit design includes inflation protection, but this is not common for traditional private pensions. Over time, most benefits paid by employer plans lose some of the purchasing power.
Social Security does more than increase retirement checks to offset inflation. It also adds this amount to the underlying benefit of a person so that it grows with compounding as future COLAs factored in.
CAN SOCIAL SECURITY AFFORD TO PAY COLAS?
In the context of a larger Social Security overhaul, proposals have been made to either increase or reduce COLAs. Many older advocates argue that the current inflation index does not accurately reflect the rising costs of health care.
Groups working to reduce the federal deficit urge switching to an alternative inflation measure that takes into account consumers’ tendency to substitute cheaper goods for higher-priced goods. This would produce slightly lower estimates for cost-of-living increases.
Social Security trustees stated in their report this past that the long-term fiscal imbalance of the program is creating a longer shadow.
Social Security’s income from interest and payroll taxes will be less than the cost of providing benefits for the first time in 39-years. Social Security will need to draw on its savings in order to fully pay the benefits.
The report also increased the expiration date for Social Security’s huge trust fund by one-year to 2034. The report stated that the program will then be unable to pay 78% of the scheduled benefits.
This would be a significant hardship for anyone who depends on Social Security, including middle-class retirees.
Washington’s political elite are not talking about fixing the problem.
David Certner (AARP legislative policy director), stated that Social Security is a matter that needs to be tackled together. “It’s very difficult to do bipartisanwork on something as important and large as Social Security in a highly partisan environment.