Social Security retirees will experience something that hasn't happened in four decades in January. Every senior who is receiving income from the popular benefits program will be affected by the change to their checks.
It may seem like a good thing, but the reality is that Social Security's hitting for the first time in decades isn't great for retirees. Retirement benefits will change in January 2022.
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This is the biggest change to benefits in a long time.
What is the big change happening to Social Security this month that hasn't happened in decades? Benefit checks are increasing annually. Social Security benefits will increase by 5.9% in 2022.
For a long time, a benefits increase above 5.8% has not happened. The last time seniors got a bigger raise was in 1982.
The largest increase in benefits since that time was 5.8% in January of 2009, as shown in the table below. In the past decade, annual raises for retirees have been much lower, with retirees actually receiving $0 in extra money in three years out of the past 13.
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The benefit increase is good news.
It seems like a great news that Social Security raise is more substantial than in the past. Cost-of-living adjustments that result in benefit increases aren't like typical raises employers may give based on merit.
The formula for determining COLAs is designed to help retirees maintain buying power. Retirees get a cost-of-living adjustment when a comparison of the costs of goods and services shows they are increasing. Data shows that inflation is surging, which is why retirees are getting a big benefits boost. Inflation isn't good for retirees.
Seniors' buying power goes down when prices go up because their savings aren't as large. Social Security and savings are important income sources for older Americans. If you withdraw a set amount from your retirement account and it doesn't buy as much as it did in the past, you end up worse off.
You might think that the big Social Security raise helps offset the damage inflation does to the value of retirees' savings. They will get bigger retirement benefit checks. The best way to help a retiree keep pace with cost increases is a COLA. Buying power shouldn't increase because the calculation matches changes in the consumer price index.
That is a best-case scenario. If inflation goes up more than the COLA because the consumer price index used to measure rising prices doesn't match senior spending, even a big raise could leave retirees unable to keep up with rising costs. If inflation goes up after the annual COLA is calculated, the raise won't be big enough for retirees.
There's a chance that both of these things will happen. Even after the biggest raise in four decades is applied to Social Security checks, they won't stretch as far.
Retirees have reason to be concerned that the consumer price index shows that inflation is higher than it has been in the past. They may be excited to see a big change to their Social Security checks in the form of larger benefits, but belt tightening may still be needed despite the fact that they will get more money.
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