If you receive Social Security benefits, you may have been happy to learn about the massive cost of living (COLA) adjustment coming in 2022. For the first time since 2008, retirees will receive an increase of more than 5%. To be precise, benefit recipients see a 5.9% increase in their monthly benefit at the start of the year. That is the largest increase since 1981.
Before you get too excited, though, there are three main reasons why a big unemployment bump could actually be bad news for retirees. Let’s see what they are.
1. The boost may not be enough to keep up with inflation
The Social Security cost of living adjustment aims to keep the purchasing power of retirees stable as costs rise over time. Prices won’t stay fixed, so if benefits didn’t rise as well, seniors would be able to buy less and less with the money they receive each year.
The reason recipients will get a big raise in 2022 is because inflation has been high this year. The problem is, even with a COLA of 5.9%, it may not be enough to maintain the purchasing power recipients had in the past with their benefits.
Food, housing, heating and prescription drugs are expected to see significant price increases in 2022. And while it would be nice to think that the raise seniors get will cover these additional costs, the reality is that the consumer price index used to determine each year’s COLA is not based on seniors’ spending habits. Instead, it is based on the spending patterns of urban wage earners and white-collar workers. As a result, it often underestimates how much a percentage of seniors’ incomes spend on goods and services, especially in areas where price increases are expected to be strongest.
So despite the fact that recipients get more money in their checks, it will likely end up buying less.
2. The boost won’t reverse decades of declining purchasing power
The same issues that will cause Social Security recipients’ COLA to be too low to keep up with inflation by 2022 have been around for a long time.
For decades, retirees, in particular, have been receiving pay increases that are simply too low for their checks to continue to provide the same standard of living. In fact, an analysis by the Senior Citizens League found that the purchasing power of Social Security benefits has fallen by 30% since 2000.
A big raise this year isn’t going to reverse that trend, so recipients will increasingly fall behind and will have to rely on their savings or cost savings to balance things out.
3. The Inflation That Causes This COLA Boost Could Also Affect Retirees’ Savings
Remember recipients are nothing but get the 5.9% increase as government data tracking price changes shows rampant inflation. The problem is, even though COLAs are applied to Social Security checks, retirees often can’t live off their retirement benefits alone. They must supplement their Social Security income with savings.
It’s also important to remember that Social Security was never intended to be the sole source of income for retirees. It was intended as a supplement or safety net for recipients and only intended to make up for a portion of the wages in retirement.
Most seniors tend to invest their retirement accounts conservatively so as not to take too much risk and put their money at risk. As a result, their investment accounts cannot provide sufficient returns to offset the impact of the high inflation that is occurring.
Because retirees find that their Social Security doesn’t go far enough, they may need to increase the amount they take out in savings to pay the basics. This could increase the risk that their nest eggs will decline faster than planned.
What to do?
Retirees need to be realistic about the fact that their big pay rise is actually an indication of bad news. They need to make sure they adjust their budgets accordingly and consider looking for opportunities to cut costs and/or generate revenue so that high inflation doesn’t leave them with serious financial uncertainty.