What is the COLA increase for 2022?
The only bright light of the recent spike in the consumer price index is the potential for a more significant Social Security cost-of-living adjustment (COLA) this year. Estimates of the Social Security COLA in 2021 (for 2022) have been in the range of 5.3 to 6.1%. ForbesHow Big Will The Social Security Cost-Of-Living Adjustment Be For 2022
The bad news: Recipients will have to wait for that bump because the Social Security Administration adjusts its payments only once a year, starting with December benefits that are paid in January. That means seniors and other Social Security beneficiaries wouldn't receive a cost-of-living adjustment (COLA) until January 2022.
In the meantime, prices forto at a time when Social Security recipients got what was among the meagerest of COLA adjustments in recent years — a 1.3% increase for 2021. As the pandemic eases, a rapid reopening of the economy is fueling pent-up spending for goods and services that in many cases remain in short supply, prompting inflation to compared with a year earlier.
Based on June's inflation numbers, Social Security recipients next year will see the biggest COLA increase since 1983, when a 7.4% bump went into effect, according to a new forecast from the Senior Citizens League, a nonpartisan group that focuses on issues relating to older people.
Some seniors are struggling with higher inflation, which is eating into the buying power of their benefit checks, said Mary Johnson, Social Security and Medicare policy analyst at the Senior Citizens League. One retiree wrote to her group to say they had to cut back to eating one meal a day because of higher costs for medical care and other expenses, she noted.
The Social Security Administration will announce its annual COLA adjustment in October, which is based on the average rate of inflation over the prior three months. To be sure, inflation could recede during the summer and early fall, potentially resulting in a lower COLA rate for 2022 than the Senior Citizens League is forecasting.
Economists predict that inflation could slow later this year, but that depends partly on supply bottlenecks easing, according to Oxford Economics.
"The big concern is that current high inflation gets built into consumers' and businesses' expectations, leading to higher long-run inflation, as happened in the 1970s," Gus Faucher, chief economist at PNC Financial Services Group, said in a research note.
But that "eye-popping" inflation might not last given that only a handful of products account for the bulk of higher prices, such as used cars and gasoline. And prices were weak a year earlier when much of the U.S. economy was still shuttered due to the pandemic, which may lead to an overstatement of inflation, Faucher added.
Even so, Social Security payments had lost buying power even before this year's higher inflation, according to a report from the Senior Citizens League. Government retirement benefits have lost about one-third of their buying power since 2000, the group found. That's due partly to health care expenses such as Medicare premiums rising much faster than inflation.
There are some efforts to overhaul how COLAs are calculated. Rep. John Garamendi, a Democrat from California, introduced a bill this month that proposes the Social Security Administration consider a different measure of inflation that better reflects seniors' real expenses.
Under the bill, the SSA would be required to use the so-called Consumer Price Index for the Elderly, which rose at an average annual rate of 3.1% from 1982 to 2011, compared with the 2.9% increase for the index that's currently used.
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15 July, 2021 - 12:00am
Here's What Drove Inflation, Social Security COLA Estimate Higher in June
by Ginger Szala
A surge in inflation in June pushed an advocacy group’s projection for the 2022 cost-of-living adjustment for Social Security to 6.1%. If that figure, adjusted monthly based on the Consumer Price Index, holds until the COLA is announced in October, it would be the biggest COLA since 1983.
The estimate is based on the 0.9% increase in the core CPI announced Tuesday by the Bureau of Labor Statistics. The CPI for all urban consumers in June rose 5.4% over the past 12 months. But what was behind the surge?
Used cars, food and gasoline, says the BLS.
“The index for used cars and trucks continued to rise sharply, increasing 10.5% in June. This increase accounted for more than one-third of the seasonally adjusted all items increase,” the BLS stated. “The food index increased 0.8% in June, a larger increase than the 0.4% increase reported for May. The energy index increased 1.5% in June, with the gasoline index rising 2.5 % over the month.”
The core index, which excludes food and energy prices, rose 0.9% in June after rising 0.7% in May.
Also part of the rise in prices were airline fares and apparel. Interestingly, “the index for medical care and the index for household furnishings and operations were among the few major component indexes which decreased in June,” the BLS states.
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Airline fares were up 2.6% (after an increase of 10.2% the previous month). Year over year, used cars increased 45.2% and airfares increased 24.6%. Although gasoline prices were up 2.2% month over month, from a year ago they are up 45.1%, according to the BLS.
Federal Reserve Board Chairman Jerome Powell has stated that increased inflation is “transitory” due to last year’s COVID-19 lockdown and the reopening of the economy.
“Inflation surprised substantially to the upside in June but, once again, owing to outsized increases in prices in a few categories,” Michelle Meyer, head of U.S. economics at Bank of America, told Bloomberg. “This reinforces the idea of transitory inflation.”
But some did not agree, noting that bond market data was putting more pressure on the Fed. The Treasury yield curve flattened as the above-forecast reading emboldened traders to bet that the central bank will tighten policy in early 2023, according to Bloomberg.
“We are told the story [from the Fed that this inflation] is transitory but the increases are going faster and for longer,” John Ryding, chief economic advisor at Brean Capital, said on Bloomberg Television. “We just had a monthly increase that was about double what was expected.”
15 July, 2021 - 12:00am
WASHINGTON — June's inflation numbers were eye-catching as prices for U.S. consumer goods increased by the most that they have in over a decade, amid related issues with supply chains and parts. Now one advocacy group for senior citizens is projecting Social Security recipients could next year see the largest cost of living increase since 1983.
Excluding volatile oil and gas prices, so-called core inflation rose 4.5% in the past year, the largest increase since November 1991. But the Fed and the White House have made clear their belief that the current bout of inflation will prove temporary.
If inflation continues to surge, the situation could be rough on older Social Security beneficiaries living on a fixed income, as the Social Security Administration adjusts its payments only once a year. That means the next cost of living adjustment (COLA) wouldn't be paid until January 2022.
The nonpartisan Senior Citizens League updated its forecast based on data through June to predict the 2022 COLA increase for Social Security benefit recipients could increase to 6.1%, according to multiple media reports. That would make it the highest COLA adjustment since 1983.
In 2021, recipients of Social Security benefits received one of the lowest COLA increases in years, a bump of 1.3% for 2021. A Labor Department report showed that prices for everyday goods jumped up 5.4% though, spelling out a rough rest of the year for those depending on their benefits to cover daily expenses.
According to Kiplinger, with that meager increase this year, the average monthly SSA payment increased by about $20. From $1,523 in 2020 to $1,543. The monthly benefit for couples inched up just about $33, from $2,563 to $2,596.
The annual COLA adjustment will be announced in October by the Social Security Administration.
Robert Frick, a corporate economist with Navy Federal Credit Union told Reuters that June's inflation numbers were "mainly temporary price increases that pumped up the figures," and that the report is "consistent with inflation cooling off later this year."
The Federal Reserve and the White House agree that pressure should start to ease at some point soon, but central bank officials have noted that the current inflation rate is a lot stronger than expected, CNBC reported.
On Wednesday, Federal Reserve Chair Jerome Powell is expected to deliver the semi-annual Monetary Policy Report to Congress.
Kathy Bostjancic, a chief U.S. financial economist with Oxford Economics said, "price increases stemming from the reopening of the economy and ongoing supply chain bottlenecks will keep the rate of inflation elevated and sticky as supply and demand imbalances are only gradually resolved," CBS reported.
But, buying power for Social Security payouts have been weakening for years according to the Senior Citizens League. Since 2000 about a third of the buying power for SSA benefits have been diminished according to a study by the group.
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15 July, 2021 - 12:00am
5% was an unexpectedly high number for inflation, but the latest figures for the CPI-W index for June now show a 6.1% annual rate of inflation over the past 12 months. The CPI-W index is the index used in calculating the annual COLA increase for Social Security recipients and federal retirees. The COLA adjustment is reflected in money received in January 2022 payments.
In May, this index was up 0.9%. In the latest figure for June, the index was up 1.1%.
The inflation reports in April and May from the Bureau of Labor Statistics put Social Security recipients on notice that their COLA for 2022 might be something special. Yet many dismissed the hefty price increases as being purely temporary in nature.
While the mix of inflation projections is confusing, there is not any doubt that inflation is going up rapidly. We have left behind the low inflation figures of the past 10 years. Some retirees who are relying on pension payments and Social Security payments will be heartened to see their annual income go up.
On the other hand, the inflation increase in the January payments will not match the real rate of price increases. Soothing statements by officials that the rate increases are temporary sound good. The reality is that when inflation leads to an increase in prices, the increases tend to stay in place (or go up less) instead of dropping back down to former levels.
In other words, the standard of living for many retirees will actually go down next year when all is said and done. More money from a retirement pension and Social Security is always better than less.
The final COLA adjustment for 2022 will not be known until mid-October 2021. The COLA rate is an automatic calculation determined through a rather complex calculation. As noted below, a projection for 2022 COLA is 6.1% from the Senior Citizens League.
There are different inflation indices announced by the Bureau of Labor Statistics.
One headline this month will read along the lines of “CPI Increased 5.4% in June”. Another will read “Inflation Index for Used Cars Up 10.5%”.
The FedSmith headline on this article cites an inflation rate of 6.1%.
While all of the headlines are accurate, they are all are citing different data.
FedSmith cited the 6.1% inflation rate. The reason for this is because this is the number for the inflation figure that will impact the annual COLA amount when the next COLA is announced for January 2022. The Bureau of Labor Statistics (BLS) refers to this index as the CPI-W index. This acronym stands for the Consumer Price Index for Urban Wage Earners and Clerical Workers.
Last month, one projection for the annual COLA increase that will be reflected in January checks was 5.3%. One month before the 5.3% projection in May, the projected COLA for 2022 was projected to hit 4.7%. Back in April, the projected COLA for 2022 was 3%.
With the most recent inflation rate, the COLA for 2022 will likely be even higher than the 5.3% projection when it is announced in October. The Senior Citizens League now estimates the 2022 COLA will be 6.1% with payments starting in January 2022. This would be the highest COLA increase since the rapid inflation that started during the Carter administration. The COLA in 1981 was 11.2% and in 1982 it was down to 7.4%.
In October 2020, the final figures for the 2021 COLA were announced. Federal retirees received a 1.3 percent increase for Civil Service Retirement System (CSRS) annuities, Federal Employees Retirement System (FERS) annuities, and Social Security benefits in January 2021.
2022 will ultimately see the highest COLA increase since 2009 when the COLA went up 5.8%. It seems likely inflation will continue to move higher. It would take a lot more inflation pressure for the CPI-W to move high enough to match the 5.8% COLA that Social Security recipients and federal employees received in 2008. But, with the rapid increase in the inflation rate, the rate may go up more than in 2008. The Senior Citizens League’s latest estimate for the 2022 COLA is now up to 6.1%.
With the second-highest reading coming in at 4.1% from 2005, the 2022 COLA will likely move into the number two position when looking back over a 30-year period and perhaps the highest COLA increase in 40 years (since 1982).
Inflation is increasing more than expected. The May inflation rate was 5% over a 12-month period. What does this mean for the annual COLA?
The author says that an increase in the federal minimum wage could have an impact on Social Security and the annual COLA for federal retirees.
15 July, 2021 - 12:00am
Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
Arguably the best feature of Social Security is that its monthly payments adjust for inflation every year. Cost of living adjustments, or COLAs for short, get incorporated into Social Security checks every January, with the goal of keeping purchasing power for seniors constant even when prices rise.
Inflationary pressures have been almost nonexistent for decades. But over the past several months, inflation has roared back onto the scene with a vengeance, and it could result in Social Security recipients getting a boost of 5% or more come 2022 -- a raise the size of which the program has seen only once in the past 30 years.
Fears about inflation started in March, when the Consumer Price Index rose 0.6% on a seasonally adjusted basis. Many thought that would prove to be a one-time aberration, but April's inflation report only got worse, with a rise of 0.8%. May's number returned to a more modest 0.6% rate, but it still marked a pronounced acceleration in price rises. Moreover, it seemed to establish a longer-term trend, even as many continued to hope inflationary pressures would soon disappear.
June's numbers were the worst yet for inflation fighters. The CPI rose 0.9% for the month, bringing the 12-month price change to 5.4%. That's the highest since 2008, and you have to go all the way back to the 1980s to see year-over-year price increases that high on a regular basis.
Again, the price increases were widespread. Some key items include:
A slightly different measure of inflation gets used for determining Social Security COLAs, and that number rose even more sharply. The CPI-W inflation index jumped 1.1% to 266.412. That brought its 12-month change to 6.1%.
June's number won't get used in calculating the COLA, but the CPI-W numbers for July, August, and September will. The three-month average will get compared to last year's corresponding average of 253.412.
If price levels were to remain exactly where they are over the next three months, then the COLA for 2022 would come in at 5.1%. With the exception of 2008's 5.8% COLA, that'd be the largest increase in benefits since 1990.
To match that 5.8% mark, the average CPI-W from July to September would have to come in about 0.6% higher than current levels. That might have seemed ambitious just a couple months ago, but all it would take is one more monthly rise in July similar to what we've seen from March to June to get to that level. From there, even flat prices would produce a COLA approaching 6%.
Getting more in Social Security benefits is nice for those on a fixed income, but dealing with higher prices isn't. For those fortunate enough to have savings on top of their Social Security income, high inflation erodes the purchasing power of retirement nest eggs. Although the CPI doesn't match up perfectly with the actual mix of goods and services those on Social Security typically use, rising prices for food and energy will inevitably hit seniors' pocketbooks.
At some point, inflationary pressures will demand a response from the Federal Reserve. For now, though, policymakers seem convinced that inflation will go away. If that happens after the measuring period ends in September, then it's possible that higher monthly Social Security checks in 2022 might actually help boost standards of living for those who rely on them.
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15 July, 2021 - 12:00am
14 July, 2021 - 10:28am
The Kiplinger Letter is forecasting that the annual cost-of-living adjustment for Social Security benefits for 2022 will be 6.3%, the biggest jump since 1982, when benefits rose 7.4%. That would also be higher than The Kiplinger Letter predicted earlier this year.
The final adjustment in October could be a little different, as the inflation rate for July through September has yet to be determined.
The projected increase reflects the rebound of consumer prices that were depressed during the pandemic. Gasoline prices rose strongly this past year, as have airline fares and hotel rates. There have been notable pickups in prices of women’s clothing, car insurance, and eating out. Prices of new cars are up because a shortage of semiconductors has limited production, which has also caused used vehicles prices to surge 45%.
Social Security COLAs are calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers. If prices don’t increase or fall, the COLA is zero. That happened in 2010 and 2011, as the economy struggled to recover from the Great Recession, and again in 2016, when plummeting oil prices wiped out the COLA for that year. In 2020, the COLA increased payouts by 1.3%.
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