The monthly Social Security benefit seniors start out collecting isn't the exact benefit they're stuck with for life. That's because those benefits are subject to annual raises, or cost-of-living adjustments (COLAs).
The purpose of COLAs is to help seniors retain their buying power when inflation strikes. Think about someone who's been on Social Security since 1991. The general cost of living has increased substantially over the past 30 years, so it stands to reason that benefits, too, would need to increase to give seniors a chance at keeping up.
The problem, however, is that in recent years, COLAs have been notoriously stingy. In 2021, seniors got a 1.3% raise. The year before, their benefits were bumped up by 1.6%. In fact, since 2010, the largest annual raise seniors got was a 3.6% boost in 2012. But in both 2011 and 2016, seniors got no COLA at all.
The coming year, however, is shaping up to be different. Based on recent inflation data, the nonpartisan Senior Citizens League is estimating that seniors could be in line for a whopping 6.1% COLA in 2022. Not only would that constitute their largest raise since 1983, but it would also surpass the 5.3% projection the Senior Citizens League put out a month ago.
Are rising COLAs a good thing?
Tiny COLAs have been hurting seniors for years and causing them to lose buying power. Why have COLAs been so minimal? The reason boils down to how they're calculated.
COLAs are based on third-quarter inflation data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the index indicates that the cost of common goods is rising, Social Security benefits get a boost.
The problem, however, is that the CPI-W isn't reflective of the expenses that cost seniors the most. Take healthcare, for example.
The cost of medical care has risen substantially over the years, and it's also something seniors are likely to spend a large chunk of their income on. But the CPI-W isn't centered on healthcare expenses. Rather, it's influenced by fluctuations in the cost of things like gasoline, which seniors may spend some money on, but not to the same extent as workers.
This year, inflation has been hitting a lot of people's wallets as the demand for consumer goods has increased and supply chains have been slow to catch up. While we don't yet have third-quarter data from the CPI-W, based on recent months' data, it's fair to assume that next year's Social Security COLA will, in fact, be substantial.
But is that a positive thing? While getting more money is good for seniors, inflation is hurting them just as it's affcting their younger counterparts who are still working. The only difference is that many seniors are on more of a fixed income and have only their Social Security benefits to pay their living expenses. So when the general cost of living goes up, as has been the case over the past few months, they tend to struggle.
As such, while it's okay to celebrate a larger COLA in 2022, seniors will also need to prepare to manage that money wisely and stretch it as far as possible. This especially holds true for those who don't have retirement savings to fall back on.
While the recent surge in consumer prices will hopefully be temporary in nature, some experts warn that we could be looking at higher living costs for a solid eight to 10 months. That's something Social Security beneficiaries need to gear up for -- no matter how generous their raise is next year.