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If you’re dependent on Social Security benefits, you’ll receive a much-needed raise. Social Security and Supplemental Income (SSI) increases benefits by 5.9%, the largest increase in 40 years.
This is welcome news for Social Security and SSI recipients who have been financially battered by the pandemic and now forced to deal with the rising costs of everything from gas to food. According to Mark Zandi, chief economist at Moody’s Analytics, households with an average income of $70,000 pay about an additional $175 each month.
While this is the largest increase in years, retirees and those receiving disability benefits typically receive an automatic annual cost of living adjustment (COLA) to maintain purchasing power and keep pace with rising prices, known as inflation.
How much will Social Security benefits cost in 2022?
Social Security’s COLA for 2022 is 5.9%, the highest increase in nearly four decades. The average Social Security check in June 2021, the most recent data available, was $1,555. A 5.9% increase would increase that monthly payment to about $1,647, up from $92.
However, this surge can’t come soon enough for Social Security and SSI recipients whose dollars aren’t going as far as they used to. The US is experiencing high inflation as the economy recovers from the Covid-19 recession. The COLA increase of 1.3% in 2021 has lagged behind the massive annual inflation rate that has developed in recent months. For example, prices in July 2021 were 5.4% higher than in July 2020.
Read more: Why is inflation rising now?
The index used to calculate inflation for Social Security benefits, the consumer price index for urban wage earners and white-collar workers (CPI-W), is heavily influenced by gasoline prices, which are already up more than 40% this year. This, combined with general price increases of other goods and services considered in CPI-W, resulted in the big increase for 2022.
COLA increases may not be enough
But even with these provisions, some argue that COLA increases will not be enough to sustain senior purchasing power, mainly due to rising health care costs, in addition to inflation-driven price increases.
First, there are Medicare costs to consider. For Social Security recipients who pay Part B premiums, the Social Security Administration works with the Center for Medicare and Medicaid Services to ensure that annual increases in Medicare Part B payments don’t diminish COLA increases.
Medicare’s innocuous provision ensures that Social Security benefits are not reduced below their current dollar value as a result of increases in the Medicare Part B premium. This effectively limits these premiums to the amount of each COLA for those who qualify.
If you keep the value of your benefit dollar the same, you will get less each year. Due to inflation you will have less purchasing power next year than this year.
In addition, the CPI-W, which tracks urban workers’ spending patterns and is the inflation measure on which COLA increases are based, may not accurately reflect how much retirees spend their money, some argue.
The general trends of the products and services that seniors buy, such as health care, often outperform the inflation rates of those goods and services tracked by the CPI-W. Over the years, this has resulted in a loss of purchasing power for many seniors, compared to the amount of support Social Security should have originally provided, despite changes in Medicare premiums.
That is why Rep. John Garamendi, D-Calif., recently introduced the Fair COLA for Seniors Act of 2021, which calls for COLAs for Social Security benefits based on the consumer price index for the elderly, rather than the CPI-W.
COLAs averaged 2.9% between 1982 and 2011, the legislation said. However, when recalculated according to the CPI-E, they would have increased by an average of 3.1%. That can add up to hundreds of dollars difference in monthly benefits (and thousands of dollars per year) over decades. Since Social Security is the single largest source of income for most seniors, these increases can be invaluable to millions of people.
COLAs in context
While COLAs help retirees today maintain their purchasing power, built-in Social Security increases weren’t always the norm.
Before 1975, Social Security benefits did not increase automatically, and Congress enacted new increases through legislation. But when inflation rose in the 1970s, Congress passed the 1972 Social Security changes to provide automatic increases for benefits. The first COLAs were rolled out in 1975, automatically giving recipients an 8% increase.
Since the inception of COLA, increases ranged from 14.3% in 1980 to no change at all based on changes in the CPI-W. The 2020 COLA was a paltry 1.3%, so today’s announced increase, one of the highest in nearly 40 years, will be welcome news for seniors and disabled Americans.