If you're already retired or are planning to leave the workforce next year, you may have been excited to hear that Social Security recipients are in line for a big raise in 2022. In fact, you may be eager to get your hands on all the extra money you're going to get after Social Security announced the largest benefit increase in four decades.
But it's important to understand the harsh reality of what a Social Security Cost of Living Adjustment (COLA) actually means for you in practice. These are the key facts to be aware of to evaluate exactly how much more spending power you're likely to have after the New Year.
Your COLA will add this much to your check
First things first.
The amount of your check will go up next year because of the Cost of Living Adjustment happening in 2022. Retirees are on track for a 5.9% COLA. So for the first step in the process of figuring out how your checks will look different next year, you'll want to add 5.9% to the current amount of your benefits.
If you were receiving the average benefit of $1,565 in 2021, a 5.9% benefits bump means you'll get $1,657 next year. That's the new average benefit for 2022. But if you were receiving less, your raise will be smaller because it's calculated on a percentage basis. If your monthly checks are for just $1,000, your benefits will go up to $1,059 -- a $59 raise rather than the $92 raise the average retiree is getting.
But rising Medicare premiums will take some away
Adding 5.9% to your check is just the first part of figuring out what your monthly Social Security payments will look like in 2022. That's because chances are you'll have Medicare Part B premiums withdrawn directly from your checks.
Medicare Part B premiums are increasing by $21.60 per month from 2021. While premiums last year were $148.50, they'll be going up to $170.10 in 2022. That means if you're on track for the average $92 raise, you'd be left with just $70.40 of it after the extra Medicare costs come out of your check.
Medicare premiums will be $170.10 for most retirees unless their income is very high. So, if your monthly benefit is just $1,000 and you're in line for a $59 per month COLA, you'll still face the same premium increase. It will reduce your $59 benefit bump down to just $37.40 per month.
Don't forget about the effects of inflation
Despite the fact that Medicare premiums are going up, seniors will still see more money from Social Security each month starting in 2022. But, sadly, a bigger check doesn't necessarily translate to more buying power. That's because even a large COLA may fall short of keeping up with the actual inflation that's occurring.
COLAs are calculated based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Many experts believe this price index underestimates how much seniors spend on certain costs such as housing and healthcare. These costs tend to see faster price increases than other goods and services. And evidence suggests that benefits have lost 30% of their buying power since 2000 because of this issue.
Not only that, but the COLA calculation is just a snapshot in time. The change in prices is measured based on changes in cost that occur in the third quarter of the year during the months of July, August, and September. If continued rapid price increases occur after that time, retirees could be left short. And evidence also suggests inflation has gotten worse since the COLA calculation for 2022.
So, retirees must remember the slightly bigger amount they'll see on paper may still leave them worse off in 2022. Seniors should keep careful tabs on their budget to ensure they aren't spending more than they can afford, even with the theoretical bump up in benefits they'll see in their first payment in 2022.