In 2022, retirees will receive more money in each Social Security check. Social Security beneficiaries are getting a 5.9% cost-of-living adjustment (COLA), which is the biggest benefits increase in decades.
While this may seem like a generous income bump, there's one other number older Americans need to know that shows why this raise really isn't good news at all -- and is actually likely to leave them falling further behind financially.
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This key number is bad news for retirees
For retirees who are excited about their Social Security raises, the latest data from the Bureau of Labor Statistics (BLS) shows why this COLA is actually not very generous at all. According to the BLS, the Consumer Price Index for All Urban Consumers (CPI-U) in October of 2021 showed there was a 6.2% increase in prices, compared with the year prior. The CPI-U tracks the price of a wide range of products and services, including rent, gas, groceries, and medical care.
If seniors are getting a 5.9% raise, and current data shows that inflation is at 6.2%, it doesn't take a lot of math knowledge to see that retirees will end up losing ground. And this is a huge problem since the COLA is supposed to help ensure benefits don't lose buying power.
Unfortunately, Social Security's COLAs are calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). And the government specifically looks at CPI-W data for the months of July, August, and September in order to determine the next year's raise. If inflation is running rampant and prices increase substantially after these months, then the annual raise seniors receive will end up being too small.
Making matters worse, COLAs often end up being insufficient, even if a huge increase in prices doesn't occur after the key months. That's because the CPI-W price index doesn't perfectly mirror the spending habits of seniors. Benefits have ended up losing around 30% of their buying power since 2000 because the CPI-W underestimates the percentage of income seniors tend to spend on things like medical care and housing -- both of which have seen huge price increases that have outpaced inflation over time.
Since seniors have already fallen behind and the raise they're getting this year is too low compared to inflation, retirees will find their checks can't buy nearly as much as they did in the past -- despite the fact that each monthly payment they get is larger.
President Joe Biden and several Democratic lawmakers have proposed a bump up in Social Security benefits for at least some retirees. However, it's not clear if any legislation providing more benefits will be able to pass in Congress.
That leaves seniors stuck trying to adjust their budgets to deal with the fact their checks won't go as far. Retirees need to carefully watch their spending and look for options to trim their costs if they were counting on Social Security's large annual raise to help them maintain their quality of living, despite rising prices.
