If you're one of the 70 million Americans receiving Social Security benefits, you’ve already seen a modest increase in the monthly benefit payments you receive. The social security cost-of-living increase of 1.3 percent started happening in January 2021.
That little bump in your Social Security check might be significantly higher when January 2022 rolls around. Some estimate that next year’s Social Security cost-of-living adjustment could be as high as 6.1 percent. That would be the highest annual adjustment since 1983.
Inflation impacts the Social Security cost-of-living adjustments.
What’s causing the increase in the cost-of-living adjustment predictions for 2022? The simple answer is inflation and rising consumer costs.
The annual cost-of-living adjustment is based on what’s happening with the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. It's usually calculated in October.
By the end of December 2020, the CPI-W estimated inflation was at 1.4 percent for the year. That estimate was used to determine the 1.3 percent cost-of-living adjustment for 2020. It was one of the lowest adjustments ever paid.
But by March 2021, the prices on everything from gasoline to pork chops had skyrocketed. From March 2020 to March 2021, the cost of gasoline rose by 22.2 percent, home heating oil rose 20.2 percent, beef prices climbed over 11 percent, and the cost of toilet paper and paper towels rose by almost 8 percent. Even a can of tuna was 7 percent higher than it was last year.
“When the prices on the goods and services that retirees depend on go through the roof, their Social Security benefits don’t buy as much, and that causes enormous financial stress for all retirees," said Mary Johnson, a Social Security policy analyst for The Senior Citizens League, in a statement.
Senior advocate group wants a minimum 3 percent guaranteed adjustment.
The nonpartisan Senior Citizens League is advocating that the annual Social Security cost-of-living adjustment have a guaranteed minimum increase of 3 percent. The group is also pushing Congress to look at the Consumer Price Index for the Elderly (CPI-E) when calculating the adjustment instead of the CPI-W.
In a survey of 1,125 retirees, 62 percent supported the idea of a minimum cost-of-living adjustment of 3 percent, the League reports.
Social Security buying power has dropped
The buying power of Social Security benefits has decreased by 30 percent since 2000, says Senior Citizen League representatives. For example, $100 worth of groceries in 2000 will only amount to about $70 in groceries today.
Higher interest rates would impact the cost-of-living adjustments.
If the Federal Reserve decides to raise interests rates, the move could impact the Social Security cost-of-living adjustment for 2022. Federal Reserve Chairman Jerome Powell has said that he won’t raise interest rates any time soon.
“A lot will depend on if inflation holds until COLA is announced and then whether inflation starts slowly coming back down again so that by January of 2022, it’s lower than it is today,” Johnson told CNBC.