Rising prices lead to biggest cost-of-living adjustment to benefits in four decades
by John Waggoner, AARP, October 13, 2021
The Social Security Administration (SSA) announced Oct. 13 that its annual cost-of-living adjustment (COLA) will be 5.9 percent, a boost to average retirement benefits of about $92 per month for individuals, starting in January. The 2022 COLA is the largest increase to Social Security benefits since the 7.4 percent hike that went into effect in January 1983. Until this year, COLAs have been modest, averaging a 1.65 percent increase annually over the past decade, with no gain at all to benefits in 2016. The increase that went into effect in January 2021 was 1.3 percent.
“Today’s announcement of a 5.9 percent COLA increase, the largest increase in four decades, is crucial for Social Security beneficiaries and their families as they try to keep up with rising costs,” says AARP Chief Executive Officer Jo Ann Jenkins. “The guaranteed benefits provided by Social Security and the COLA increase are more crucial than ever as millions of Americans continue to face the health and economic impacts of the pandemic. Social Security is the largest source of retirement income for most Americans and provides nearly all income (90% or more) for 1 in 4 seniors.”
How the Social Security COLA is calculated
The annual Social Security COLA is based on the change in prices of a market basket of goods. To measure these changes, SSA uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
For the 2022 COLA, SSA measured the change in the average CPI-W index from July, August, and September of 2020 to the average CPI-W index for the same three-month span in 2021. The percentage change between the two quarterly averages is the COLA starting in January 2022.
The 2022 COLA was so large because prices of goods and services have significantly increased in the past year, due in part to extreme weather and COVID-19 outbreaks, which have driven up energy prices and strained the world’s supply chains.
Since Congress initiated automatic annual COLAs in 1975, there have been three years in which benefits didn’t increase at all: 2010, 2011 and 2016. The single biggest increase, 14.3 percent, went into effect in January 1981.
COLA increases by year
Note: COLA changes take effect the next Jan. 1
Source: Social Security Administration
Social Security is funded by a payroll tax of 12.4 percent on eligible wages — employees pay 6.2 percent and employers pay the other 6.2 percent (with self-employed workers paying the entire 12.4 percent). Next year, the maximum amount of wage earnings subject to the Social Security tax will increase to $147,000 from $142,800 in 2021. The money paid in by today’s workers goes to cover current benefits, with any excess going into the Social Security Trust Fund.
Because there are fewer workers relative to the growing number of Social Security beneficiaries, the Social Security system is facing increased stress. In their 2021 annual report, Social Security’s Trustees estimated that if no legislative action is taken, the trust fund for retired workers and their survivors will run short of money in 2033. Even at that point, over three-quarters of benefits could still be paid out from incoming payroll taxes. A separate Trust Fund that pays disability benefits is projected to run short of money in 2057.
Social Security and Medicare Part B premiums
Most Social Security recipients will see their COLA reduced by an increase in the cost of Medicare. Medicare Part B premiums, which cover physician visits and outpatient medical services, are typically deducted directly from Social Security benefit payments. The 2022 monthly premium for Medicare Part B recipients has yet to be announced; the standard premium in 2021 is $148.50 per month. An increase of about $10 is projected for 2022. “Given its importance to income security, policymakers should work together to ensure the long-term solvency and adequacy of Social Security and to protect the hard-earned benefits of millions of Americans and their families,” Jenkins says. “Congress must also complete ongoing work to protect seniors by reducing one of their fastest rising costs – high drug prices – and expanding access to needed dental, hearing and vision coverage in Medicare.”
John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger’s Personal Finance and USA Today and has written books on investing and the 2008 financial crisis. Waggoner’s USA Today investing column ran in dozens of newspapers for 25 years.
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