By 2022, Social Security retirees will see a 5.9% increase in their Social Security benefits, thanks to the largest adjustment in the cost of living (COLA) in about 40 years.
this increase may seem generous at first glance, but the reality is that actually helping seniors maintain their standard of living probably won’t help.
There’s a simple reason for this, and it’s one that every current and prospective retiree needs to understand so they can have a realistic idea of what Social Security benefits will do for them in their later years.
Even a large increase does not help seniors maintain their purchasing power
The sad reality for seniors is that the benefits have been lost purchasing power for decades, so retirees are starting to fall behind. And while it may seem big on paper, this year’s increase is likely to fall again below the inflation level that seniors will actually experience in 2022.
Social Security annual COLA is determined based on the consumer price index for urban wage earners and white-collar workers (CPI-W). For many years, CPI-W has offered retirees less compensation than would be necessary to keep up with the price increases they are experiencing because CPI-W does not accurately reflect what they spend their money on.
CPI-W has overweighted certain expenses, such as entertainment costs, and understated things that seniors tend to spend an inordinate amount of their money on, such as health care and housing. This is a natural consequence of the price index being designed to reflect how urban wage earners spend their money, a demographic with different priorities than seniors who have left the job market.
The Senior Citizens League thinks benefits have lost about 30% of their purchasing power since 2000 as a result of using this ill-fitting formula to calculate COLAs. A large increase in 2022 will not reverse the decades of declining benefit value.
That’s especially true, because while the rise in benefits this year seems big, a 5.9% increase in benefits may not be enough to explain how quickly the prices of goods and services are rising.
Recent estimates suggest that costs have increased by nearly 7% year over year. High costs for basic necessities such as food and housing likely mean seniors will still struggle to pay for their expenses, which will grow faster than their monthly income.
President Joe Biden has recognized this problem and has proposed a social security solution that would mean that long-lived retirees who have suffered damage as a result of the depreciation of their benefits over the years would receive a one-off payment. He also wants to change the formula used to calculate COLAs into a different price index that better reflects the actual spending pattern of the elderly.
But with lawmakers struggling to pass meaningful legislation, it’s unclear whether any of President Biden’s proposals will materialize. Unless or until they do, retirees will have to face the reality that the 5.9% increase they get this year will still not be enough to maintain their standard of living unless they also increase their income from other sources.