Washington, Oct. 13 (BUS): Rising inflation is expected to significantly increase Social Security’s 2022 annual cost-of-living adjustment. Inflation is through September, a data point used in the final calculation.
Over the past 10 years, Social Security COLA has averaged about 1.7% per year as inflation has remained low. But the economic recovery from the coronavirus pandemic has driven up prices for a wide range of goods and services, and that is expected to translate into greater checks for retirees, the Associated Press (AP) reported.
Why are Social Security benefits adjusted?
Policy makers say COLA serves to preserve the purchasing power of Social Security benefits and should not be seen as an increase in retiree pay.
At one point, Congress had to approve increases in inflation, but starting in the mid-1970s, lawmakers turned that job over to nonpartisan experts within the government bureaucracy. The annual review is now linked to changes in an official measure of inflation and moves automatically and without brinkmanship.
How big is the increase for 2022?
The Great Recession saw COLA increase by 5.8% for 2009, and next year’s number may rival that.
This summer, government economists expected the value of COLA to be in the 6% range. If so, it would be the largest rise in Social Security seen by the vast majority of baby boomers. So far, they’ve collected little to modest annual adjustments, not counting the three years that COLA hasn’t been because inflation barely showed a pulse.
A 6% COLA would increase the average Social Security payment for a retired worker by roughly $93 a month, to $1,636 next year. Compare that to this year’s COLA, at just $20 a month.
What has changed over the past year?
As the economy recovers from the shock of the coronavirus lockdown, prices are rising at a very good rate.
Gas acts as a constant reminder, over $3 a gallon in most states, and $4 a gallon in California and Hawaii. But food was already rising and so were labor costs as employers compete to hire select workers seeking higher salaries and better benefits. Add to the mix supply chain problems that have slowed delivery of everything from refrigerators to running shoes.
It is all sifted into the prices consumers pay for their daily needs.
Who is affected?
COLA is large enough to have a macroeconomic impact.
It affects the family budgets of about 1 in 5 Americans, including Social Security recipients, disabled veterans and federal retirees, about 70 million people.
About half of seniors live in households where Social Security benefits make up at least 50% of their income, and a quarter depend on their monthly payments for all or nearly all of their earnings. For this last group, COLA can literally make a difference in what they can put on the table.
Do private pensions also provide colas?
Inflation protection is central to the design of Social Security benefits, but it is not very common among traditional private pensions. The benefits paid by most employer plans gradually lose some of their purchasing power over the years.
Social Security not only increases retirees’ checks to compensate for inflation, but then adds this amount to the individual’s basic benefit so that it grows with the accumulation as COLA is taken into account in the future.
Can the Social Security Administration keep paying for drug abuse?
Proposals to increase or decrease social security adjustments have been made in the context of comprehensive social security reform. Many advocates of older people argue that the inflation index currently in use does not adequately reflect the rising health care costs that aging faces.
On the flip side, groups pressing to reduce the federal deficit are urging a shift to an alternative inflation measure that takes into account consumers’ habit of substituting for cheaper goods when prices rise. This will result in slightly lower estimates of changes in the cost of living.
The Social Security Trustees said in their report this year that the program’s long-term financial imbalance casts a long-term shadow.
For the first time in 39 years, the cost of providing benefits will exceed total Social Security income from collecting payroll and interest taxes. From now on, Social Security will have to draw on its savings to pay the full benefits.
The report also raised the depletion date of the massive Social Security trust fund by one year, to 2034. At this point, the program will only be able to pay 78% of planned benefits, according to the report.
Such a reduction would be very difficult for most people who depend on Social Security, even middle-class retirees.
But hardly anyone with political influence in Washington talks about reforms.
“Social Security is an issue that really needs to be addressed together by both parties,” said David Sertner, director of legislative policy at AARP. “It’s very difficult to do bipartisan work on something as big and important as Social Security in a very partisan atmosphere.”
RAE