In 2022, Social Security retirees will likely receive a Social Security cost-of-living adjustment (COLA) equal to 6% to 6.1% of their benefits, according to the Senior Citizens League. This is the biggest benefit increase in decades and will leave the average retiree with about $93.20 more in their monthly checks.
Compared with the 1.3% COLA retirees received in 2021, a 6% raise sounds like a fortune and could, in theory, have retirees jumping for joy. There's just one problem, though: This large raise is actually really bad news for seniors. Here's why.
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Why a large Social Security COLA could leave Social Security retirees worse off
Social Security retirees are getting such a large raise in 2022 for a very simple reason: high inflation.
See, annual cost-of-living adjustments are based on changes to a consumer price index called CPI-W. The Consumer Price Index for Urban Wage Earners and Clerical Workers is the index used, and it shows there's been a dramatic increase in prices.
This inflation is expected to continue into next year -- and it will have consequences. Retirees will see much higher Medicare Part B premiums in 2022, with the Congressional Research Service estimating a 6.2% premium increase and monthly costs jumping from $148.50 to $157.70. Most retirees pay premiums out of their Social Security checks, so they'll find that some of their raise disappears even before it hits their bank accounts.
Costs are also expected to rise dramatically on other purchases seniors make frequently, including food, housing, and electricity. And, while the COLA should theoretically ensure seniors don't lose buying power despite some of the highest inflation in decades, past research has shown these adjustments aren't very good at that.
See, CPI-W measures price increases on the purchases that urban wage earners and clerical workers are making, but they don't have the same spending habits as retirees. Seniors tend to spend a higher percentage of their income on the very types of consumer goods and services that are seeing the biggest jumps in price.
Over the past two decades, retirement benefits have actually lost about 30% of their buying power because COLAs haven't been large enough to enable seniors to keep up. Retirees are starting from behind, and even the 6% COLA this year likely won't be enough to account for the actual cost increases they face in 2022.
It's also important to remember that seniors only get around 40% of pre-retirement income from Social Security. Most need much more to live on, and supplementary income likely comes from savings. The problem is, retirees tend to need to invest conservatively because they don't have time to wait out market downturns -- which means their savings could rapidly lose buying power during times of high inflation.
So, while a 6% raise may sound nice, if it's not enough to keep up with rising costs and if the real value of their nest egg falls because of high inflation, seniors won't end up better off at all.
