In 2022, Social Security retirees will likely receive a Social Security cost of living (COLA) adjustment equal to 6% to 6.1% of their benefits, according to the Senior Citizens League. This is the biggest benefit increase in decades and will leave the average retiree about $ 93.20 more in their monthly checks.
Compared to the 1.3% of COLA retirees received in 2021, a 6% increase looks like a fortune and could, in theory, make retirees jump for joy. There is just one problem, however: this large increase is actually very bad news for the elderly. Here’s why.
Why a large Social Security COLA could make matters worse for Social Security retirees
See, the annual cost of living adjustments are based on changes in a consumer price index called CPI-W. The consumer price index for urban and office workers is the index used, and it shows that there has been a dramatic increase in prices.
This inflation is expected to continue next year – and it will have consequences. Retirees will see much higher Medicare Part B premiums in 2022, with the Congressional Research Service estimating a 6.2% increase in premiums and monthly costs from $ 148.50 to $ 157.70. Most retirees pay premiums on their Social Security checks, so they will find that part of their raise wears off before it even reaches their bank account.
The costs of other frequent purchases made by older people, including food, shelter and electricity, are also expected to increase dramatically. And, while the COLA should theoretically ensure that older people don’t lose their purchasing power despite the highest inflation in decades, previous research has shown that these adjustments aren’t very good for it.
See, the CPI-W measures price increases on purchases that urban wage earners and office workers make, but they don’t have the same spending habits as retirees. Seniors tend to spend a higher percentage of their income on the very types of consumer goods and services that experience the greatest price increases.
Over the past two decades, pension benefits have actually lost about 30% of their purchasing power because the COLAs weren’t big enough to keep seniors up to speed. Retirees are starting from behind, and even the COLA of 6% this year is unlikely to be enough to explain the real cost increases they will face in 2022.
It is also important to remember that older people only move around 40% of Social Security pre-retirement income. Most need a lot more to live on, and the extra income probably comes from savings. The problem is that retirees tend to need to invest prudently because they don’t have time to wait for market downturns, which means their savings could quickly lose their purchasing power by period of high inflation.
So while a 6% increase may seem attractive, if that is not enough to cope with rising costs and if the real value of their nest egg falls due to high inflation, the elderly will not fare at all any better.