If you receive Social Security benefits, you may have been pleased when you heard about the huge cost-of-living adjustment (COLA) coming in 2022. For the first time since 2008, retirees are getting a raise topping 5%. To be exact, benefit recipients will see a 5.9% boost in their monthly payout at the start of the year. That's the largest increase since 1981.
Before you get too excited, though, there are three big reasons why a big benefits bump might actually be bad news for retirees. Let's take a look at what they are.
1. The boost may not be enough to keep pace with inflation
Social Security's cost-of-living adjustment is meant to keep retirees' buying power stable as costs increase over time. Prices don't stay fixed, so if benefits didn't rise as well, seniors would be able to purchase less and less using the funds they receive with each passing year.
The reason recipients are getting a big raise in 2022 is because inflation has been high this year. The problem is that, even with a 5.9% COLA, it may not actually be enough to maintain the buying power recipients had with their benefits in the past.
Food, housing, heating, and prescription drugs are all expected to see substantial price increases in 2022. And while it would be nice to think the raise seniors are getting will cover these added expenses, the reality is that the consumer pricing index used to determine each year's COLA isn't based on the spending habits of seniors. Instead, it's based on the spending habits of urban wage earners and clerical workers. The result is that it often underestimates how high a percentage of income seniors spend on goods and services, especially in areas that are expected to see some of the sharpest price increases.
So, despite the fact that recipients will get more money in their checks, it will likely end up buying less.
2. The boost won't reverse decades of declining buying power
The same issues that will cause Social Security recipients' COLA to be too low to keep pace with inflation in 2022 have been persisting for a long time.
For decades, retirees especially have received raises that are simply too small to allow their checks to continue affording them the same standard of living. In fact, an analysis by the Senior Citizens League revealed there's been a 30% decline in the buying power of Social Security benefits since 2000.
A large raise this year won't reverse that trend, so recipients will keep falling more and more behind and will need to rely on their savings or cost-cutting to balance things out.
3. The inflation causing this COLA boost could also affect retirees savings
Remember, recipients are only getting the 5.9% raise because government data tracking price changes shows rampant inflation. The problem is, while COLAs are applied to Social Security checks, retirees often can't live on their retirement benefits alone. They need to supplement their Social Security income with savings.
It's important to remember too that Social Security was never meant to be the sole source of income for retirees. It was meant as a supplement or backstop for recipients and only designed to make up for a portion of wages in retirement.
Most seniors tend to invest their retirement accounts conservatively so as to not take on too much risk and jeopardize their funds. As a result, their investment accounts may not produce large enough returns to offset the impact of the elevated inflation that's occurring.
As retirees find their Social Security doesn't go far enough, they may need to increase the amount they withdraw from savings just to afford the basics. This could increase the risk of their nest eggs diminishing quicker than planned.
What to do?
Retirees need to be realistic about the fact that their big raise is actually an indication of bad news. They should make sure to adjust their budgets to account for this and consider looking for cost-cutting opportunities and/or income-generating possibilities so high inflation doesn't leave them facing serious financial insecurity down the road.