Social Security is a key component in ensuring the financial security of our nation's retiree workforce, regardless of whether you realize it. Gallup asked non-retirees how much they planned to rely on Social Security during retirement. Only 15% of those polled said it wasn't necessary. The remaining 38% of respondents said that it would be a major source of income. This is an unprecedented high in this poll, dating back to 2001.
The importance of Social Security income is obvious. This announcement, the annual cost of living adjustment (or COLA), is usually released in the second week of Oktober.
How is the Social Security COLA calculated?
COLA, in simple terms, is the "raise” that Social Security beneficiaries of more than 65,000,000 can expect to receive each year to account for inflation (i.e. the rising cost of goods and/or services).
Social Security's COLA depends on changes to the Consumer Price Index (CPI-W) for Urban Wage Earners and Clerical Workers. There are eight main spending categories in the CPI-W and many subcategories. Each has its own weighting. The CPI-W is able to convert this data into a simple-to-understand figure as the price of this predetermined basket goods and services changes.
Social Security's COLA is calculated using a very narrow timeframe. The "raise" for the next year is determined only by the CPI-W readings in the third quarter (July to September). The nine remaining months are not used to determine the final COLA reading. They can help identify trends but they do not have any bearing.
To keep things simple, the Social Security COLA simply represents the average CPIW reading for the current third quarter compared to the CPIW reading for the same period last year. Beneficiaries will be paid a greater payout in the next year if the average CPIW reading increases in the current year. This is based on the percentage increase in average third-quarter CPIW readings, which are rounded up to the nearest tenth.
Social Security could be a first for more than half of the country
The upcoming year could be a landmark for more than half of the country (roughly 169 million Americans according to the U.S. Census Bureau).
The U.S. Bureau of Labor Statistics published July 2021 inflation data on Aug. 11. The report revealed that the CPIW increased by 6% in the past 12 months. This is only one of three monthly readings required to calculate Social Security's COLA. It does however indicate that the 2022 COLA may be the highest in a very long time.
According to The Senior Citizens League, a nonpartisan senior advocacy organization, Social Security's COLA will rise by 6.2% in 2016. This would be the largest increase in benefits payouts since the 7.4% COLA, which was announced in 1982 and passed in 1983. This means that roughly 169 million Americans today didn't even get born when Social Security last passed on a benefit increase this large.
Transportation and energy are two of the main reasons prices have risen so fast. The Consumer Price Index for All Urban Consumers, a measure similar to the CPI, revealed an unadjusted 23.8% rise in energy costs in July. This is due to the fact that crude oil and natural gases prices have risen significantly since the recession low in U.S. economy.
The same goes for vehicle and transport costs. The July CPI-U data showed that prices for used cars and trucks increased by 41.7% compared to the previous-year period. Transportation service costs rose 6.4%.
There's no reason to be happy about a historically high payout bump for beneficiaries.
A 6.2% increase in benefits would be a welcome surprise to the 65 million Social Security beneficiaries. Over the past 12 years, COLA increases have averaged around 1.4%. This includes three years when no COLA was provided. An average retiree's monthly benefit would rise by $62 per year, or $97, if there was a 6.2% increase.
Two important points must be made. The COLA is not designed to "get ahead" of retired workers. It is merely an inflation-control device. The rising cost of goods and services across various aspects of the economy will likely offset most of Social Security's 65,000,000 beneficiaries.
Second, since the start of the century, Social Security dollars' purchasing power has been steadily declining. A May report by TSCL stated that beneficiaries have lost 30% in their purchasing power since 2000. This means that $100 worth of Social Security income in 2000 could purchase only $70 worth goods and services. The real inflation seniors face is simply not being reflected in the payout increases.
The CPI-W is the most comprehensive measure of the spending habits and incomes of urban and clerical workers. They spend differently to seniors than they do seniors. The CPI-W shows that important costs for seniors like shelter and medical care are underweighted, while lesser-important expenses such as education or apparel are given a greater weighting. This disparity has led to Social Security beneficiaries losing some purchasing power.
Although 2022's COLA may be the highest in almost four decades, it is not cause for celebration.
