There's a good chance that you will be dependent on Social Security when you retire to make ends meet. Gallup conducted a national poll asking non-retirees how they expected to rely on Social Security after retirement. Only 15% of respondents expected it would not be a vital source of income in 2021. This compares to 38%, who said it would be a major income source. This is an unprecedented high in this poll dating back to 2001.
Given the importance of Social Security to the financial well being of more than 65 million beneficiaries, it's hard to imagine a decision that is more important than the cost of living adjustment (COLA), announced in the second week October.
Social Security's cost of living adjustment is not a raise in actuality.
COLA is the beneficiary's "raise" from one year to another. Because it isn't an increase in payments that's intended to make beneficiaries more financially secure, I put "raise" in quotation marks. It's not intended to account for inflation, i.e. the rising cost of goods and services, that Social Security beneficiaries have had to contend with over the past 12 months.
Social security's COLA is determined based on changes in the Consumer Price Index (CPI-W) for Urban Wage Earners and Clerical Workers. There are eight main spending categories in the CPI-W, as well as dozens of subcategories. Each has its own weighting. It is possible to calculate the inflation rate (or deflation) by comparing the prices of a set of predetermined goods and services.
Social Security's COLA is determined based on the CPI-W readings of July through September in the third quarter (Q3). Beneficiaries are entitled to a bump in their payouts if the average CPIW reading from Q3 this year is greater than the average CPIW reading from Q3 last year. The "raise" simply refers to the increase in CPI-W from Q3 of the current year to Q3 of the previous year. This is then rounded up to the nearest tenth percent.
It's possible that Social Security beneficiaries could be quite surprised when they check their bank accounts in January.
What would the 2022 Social Security Benefits be worth?
According to the U.S. Bureau of Labor Statistics, inflation has increased in a significant way over the last year. The BLS published data on Aug. 11 showing a 6% rise in CPI-W for the trailing twelve months. The Senior Citizens League (TSCL), a nonpartisan advocacy group for seniors, interpreted this reading to predict that Social Security's 2022 COLA will be 6.2%.
A 6.2% COLA would be the largest year-over-year increase in benefits since 1983 (which had a 7.4% COLA). The last time COLA was so robust, around 169 million Americans were alive in 2003.
The big question is: What does a 6.2% COLA look like in terms of additional monthly payments for average Social Security beneficiaries?
It really all depends on your definition of "average beneficiary."
People associate Social Security with helping retired workers. 72% of the 65.04 million program participants were retired in July 2021. We can calculate that the average payout for December will be $1,568 based on $1,556.72 received by the average retiree from the program in July.
Based on the above figure, an average retiree would receive a monthly increase of between $97 and $1,665 if a 6.2% COLA was passed in January 2022. This amounts to an annual jump of just over $1,165.
Social Security provides monthly benefits to more than 8,000,000 disabled workers and 5.8million survivors of workers who have died. The average monthly benefit for disabled workers was $1280.62 in July. While the average monthly survivor benefit was just $1,249, it was $1,249 in July. The average monthly payout for disabled workers should be around $1,283. Survivors should bring home approximately $1,254 per month.
The average disabled worker would be able to earn $80 more each month with a 6.2% COLA. This would increase their monthly benefit to $1,363. The average survivor would see a $78 monthly increase, which would raise their monthly payouts to $1,332.
Champagne should be kept on ice for safety reasons
The 2022 average monthly payout could increase by between $78 to $97 for 60 million of the 65 million beneficiaries. This is not cause to celebrate.
We only have CPIW data for one month (July), but the larger issue for monthly payment recipients is that the CPIW has not done a good job in tracking true inflation that program beneficiaries are experiencing.
The CPI-W, as its full title suggests, tracks urban and clerical workers' spending habits. These are often working-age Americans, who tend to spend money differently than senior citizens, who make up the majority of Social Security beneficiaries.
Urban and clerical workers, for example, spend less on housing and medical care than seniors. They spend much more on education, clothing, and transportation than do seniors. The CPI-W is able to underweight seniors' important expenses while allowing for less important ones.
Earlier this year, TSCL published a study that showed that CPI-W's flaws have decreased the purchasing power for Social Security dollars for retirees by 30% since 2000. A retiree can only buy $70 worth of the same goods and services with $100 in Social Security Income. Social Security beneficiaries are likely to see their purchasing power decrease over the coming years, as there is no legislative fix.
In 2022, 65 million people will receive a boost in their payouts. However, higher costs such as higher shelter prices and Medicare Part B premiums will eat up most of the increase in payouts.
While it will be a welcome increase in benefits, beneficiaries would be wise not to drink the champagne.
