2022 COLA could be the biggest since 1983
Based on how inflation ran in 2020, Social Security's cost of living adjustment for this year, which began affecting payments in January, was 1.3%. It boosted benefit checks by an average $20, according to an estimate from the advocacy group The Senior Citizens League.
This year's price hikes have gobbled up that increase.
Following the release of the government's July inflation data on Wednesday, the League projected that Social Security benefits could be boosted in 2022 by 6.2% — up from the group's previous forecast of a 6.1% COLA for next year.
If the advocates are right, Social Security checks would see their biggest increase since 1983, when the COLA was 7.4%. The Social Security Administration will announce the 2022 COLA this fall.
A generous increase could be bittersweet. Mary Johnson, the Social Security and Medicare policy analyst at The Senior Citizens League, says some Social Security recipients could see cuts in other benefits because of their larger checks.
“Higher income could lead to trims in food stamps, rental assistance or Medicare Extra Help, which covers most prescription drug costs," Johnson tells Moneywise.
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Rethinking the COLA calculation
Advocates have been arguing for years that Social Security COLAs shortchange seniors because they don't accurately reflect the prices older people pay. Legislation that would alter the way the raises are calculated has been reintroduced in the U.S. House of Representatives.
The Fair COLA for Seniors Act of 2021 would base the annual adjustment on a "consumer price index for the elderly." It would reflect the costs of items typically purchased by people ages 62 and up, and it could result in higher Social Security payments.
"Using a COLA that actually reflects how retirees spend their money – especially in health care – is a no-brainer that will increase benefits and make Social Security work better for the people it serves," said California Democratic Congressman John Garamendi, the bill's sponsor, in a news release.
Research by The Senior Citizens League shows that focusing on the prices actually paid by the elderly would have led to a larger COLA every year since 2016. But the differences might not have been significant.
Between 2016 and 2021, increases in overall consumer prices averaged 1.3%. The theoretical price index calculated by The Senior Citizens League would have seen average 1.71% growth over the same period.
Advocates order an extra large COLA
Something must be done, Johnson says, because Social Security has not kept pace with retiree costs, especially medical expenses and housing, which have tended to rise more quickly than overall inflation.
And, retirees say COVID has put them under serious financial pressure. In a new survey from The Senior Citizens League, over a third of seniors, 34%, say they've used up their emergency savings since March 2020.
About 1 in 5, 19%, report drawing down their retirement savings more than usual. The same percentage say they have visited a food pantry or applied for food stamps since the pandemic began.
The Senior Citizens League is calling on the Social Security Administration to take three big steps to better meet the increasing financial challenges faced by the elderly:
- Provide a one-time, modest boost to all retirees, to help increase the buying power of their Social Security benefits.
- Tie the annual inflation adjustment to a consumer price index that more accurately reflects the buying patterns of retired and disabled households, which tend to devote a bigger portion of their income to housing and medical expenses. (The Fair COLA for Seniors Act would appear to do this.)
- Provide a guaranteed minimum COLA of no less than 3%. "This would be especially important in years when there is deflation and the COLA drops below zero, as it has done three times in the past," Johnson says.
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Fight back against inflation
The Federal Reserve has said repeatedly that it expects inflation to be "transitory." But while prices are still surging, there are several things all Americans — including seniors — can do to mitigate the budget-battering effects of inflation.
If you’re still making payments on your mortgage, it's a good time to refinance and slash your monthly payment. Thirty-year mortgage rates are holding on below 3%, and the recent end of a pesky refinance fee has made the process an even better deal.
To protect yourself from skyrocketing health care costs, look for a better deal on health insurance. Use a website that allows you to compare plans from hundreds of insurers, to see if there's an option that provides the coverage you need — but with lower premiums and out-of-pocket costs.
When you shop online, take advantage of every bargain and don't overpay. Download a handy browser extension that hunts for lower prices and instantly provides the promo codes websites ask for during checkout.
A few wise investments can help ward off the effects of rising costs.
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