Social Security retirees are getting their biggest raise in two decades in 2022. That's good news, right? Unfortunately, the 5.9% cost of living adjustment (COLA) seniors are getting next year is actually really bad news for two big reasons.
Here's why seniors shouldn't get too excited about the benefits bump they'll experience next year.
1. The reason for the COLA
The biggest reason Social Security's big raise is actually bad news is because the raise is so large only because inflation is so high. Inflation refers to price increases that occur over time. It causes a decrease in purchasing power, unless income goes up accordingly.
Social Security COLAs are meant to help retirees income keep pace with inflation, since they don't get salary bumps as current workers do.
COLAs are calculated based on year-over-year price changes as reflected by a specific price index called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Since CPI-W showed prices for goods and service were up a lot in 2022 compared with in 2021, retirees will end up getting a big Social Security benefits increase.
But the problem is, Social Security isn't the sole income source for most retirees. Most seniors also need to rely on savings. And inflation is really bad news for savers because it means the buying power of their nest egg falls.
Most seniors have conservative investment portfolios, since they can't afford to take big risks in the market when they're relying on their investment income to support them. That means they don't earn the same high returns that younger investors with more exposure to stocks do. When inflation is very high, it reduces their effective returns further. And it could mean they end up having to take more money out of their accounts to maintain their standard of living -- thus putting them at greater risk of running short later in life.
Sadly, this means that the very factor that resulted in a large Social Security raise could leave seniors stuck with a choice between facing a decline in their current quality of life, as their retirement account distributions don't buy as much, or risking running short later in life.
2. The size of the COLA
While that news is bad enough, there's also another problem.
The Social Security COLA is meant to preserve the buying power of Social Security benefits, but it hasn't done that. Prices on the key items seniors buy have gone up faster than Social Security benefits for decades. And, since 2000, benefits have lost a third of their buying power as a result.
Since some recent measures suggest inflation has caused more than a 5.9% price increase compared with last year, the COLA is likely to fall short again. This means Social Security benefits won't go as far as they did in 2021, even with the big raise.
With both of their primary income sources adversely impacted by current inflation levels, seniors could face some tough choices in 2022. But, the good news is, with careful budgeting and by implementing techniques like making full use of credit card rewards and senior discounts, retirees may not be left facing long-term financial consequences -- as long as they're aware that the Social Security raise is actually not a great thing rather than a promising piece of news.