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How Next Year's Social Security Increase Crushes the Average
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How Next Year's Social Security Increase Crushes the Average

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How Next Year's Social Security Increase Crushes the Average

Seniors receiving Social Security checks are entitled to periodic benefit increases called Cost of Living Adjustments (COLAs). These COLAs are critical to ensure retirees don't lose buying power as prices rise over time due to inflation.

In recent years, however, the COLAs have been very small. That's all changing in 2022, though, as this year's benefit increase is more than four times higher than the average in recent years.

Image source: Getty Images.

Retirees will get their most generous raise in decades

Over the past 12 years, Social Security's cost of living adjustments have been meager. In fact, they've averaged just 1.38%.

And, as the table below detailing past COLAs shows, in some years retirees haven't received any Social Security benefits increase at all.

YearCOLA
January 20211.3%
January 20201.6%
January 20192.8%
January 20182.00%
January 20170.3%
January 20160%
January 20151.7%
January 20141.5%
January 20131.7%
January 20123.6%
January 20110%
January 20100%

Table source: Social Security Administration.

In 2022, however, the newly announced COLA dwarfs the meager raises retirees have received for more than a decade. Seniors will be getting a 5.9% benefit increase in 2022, which is the largest increase since 1982.

The reason the COLA dwarfs recent past raises is because inflation is so much higher than it has been recently. See, COLAs are calculated using a very specific method. The annual Social Security raise is determined based on how much prices have risen year over year as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W showed massive inflation this year, with prices spiking in key areas.

When costs rise, if Social Security benefits didn't increase, seniors would end up losing buying power. Eventually, benefits wouldn't be worth much at all and retirees would find themselves struggling to afford basic necessities. COLAs are intended to help ensure that doesn't end up happening.

Unfortunately, the low COLAs in recent years may actually not have been high enough to help retirees avoid losing ground. That's because the composition of goods and services that makes up CPI-W doesn't perfectly mirror the spending habits of retirees who have different needs than urban wage earners and clerical workers. Retirees tend to spend less on things like entertainment while a larger percentage of their money goes toward medical and housing expenses.

Benefits have actually seen a 30% reduction in value over the past two decades because of this. And while it would be nice to think that a 5.9% COLA in 2022 will help retirees make up for some of the buying power they've lost, the reality is that even with such a large raise, it still may not reflect the real rise in prices older Americans experience.

Still, the fact that seniors will see more money in their checks next year can help with budgeting since they'll at least be bringing home more cash to spend -- even if it doesn't go as far. Retirees should take advantage of the extra benefits by reworking their budgets to ensure they are making the most of the additional money that will start showing up in their checks in 2022.

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The Motley Fool has a disclosure policy.

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