If you are a recipient of Social Security benefits, you likely look forward to your COLA increase in benefits every year. Some years, however, do not bring an increase in your benefit payments. As prices rise, retirees often struggle attempting to live on the same level of income. These COLA increases are necessary to help benefit recipients keep up with inflation and continue to maintain the same standard of living. So, how much was the Social Security increase for 2021? We will give you all the details as well as discuss how much you might expect to see in 2022. Keep reading to learn more.
What Is The Social Security COLA?
The cost of living adjustment for Social Security increases benefit payments for retirees and disability recipients to adjust for inflation. When Social Security was first introduced, the benefit payment amounts remained the same for roughly 20 years. Can you imagine not getting a raise in your income for 20 years? With inflation, the buying power of your dollar is almost constantly decreasing. Thankfully, Congress saw the need for an increase in payments and approved a one-time increase. The process remained the same for another 20 years or so – with Congress needing to approve a benefit increase each time one was needed. This process became quite cumbersome, and most Americans were tired of waiting on Congress to act each time that benefits needed to increase.
So, Congress paved the way for automatic COLA increases in 1972. These automatic increases became effective in 1975. As consumer prices increase, so do benefit payments. Congress no longer needs to pass a special amendment to increase benefit payments to adjust for a higher cost of living. These annual COLA increases were a welcome sight for Social Security recipients as they try to keep up with rising annual costs of living. Most retirees live on a fixed income, and inflation can really put a strain on their personal finances.
How Is A COLA Increase Calculated?
The annual increase is tied to the consumer price index values. The change in consumer prices is measured by the CPI year over year, and this same increase is applied to Social Security benefits. So, if the CPI increases 2% from one year to the next, then retirement benefits and disability benefits will increase by 2% that year. On rare occasions when the CPI might decrease, then there will be no change to benefits. They will never decrease as a result of a COLA.
Here is how the specific calculation for a Social Security COLA works. The consumer price index data is obtained. Specifically, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is used in the calculation. The Social Security Administration (SSA) relies on the Bureau of Labor Statistics to obtain this figure. The figure from the third quarter of the last year in which there was a COLA increase is compared to the figure from the third quarter of the current year. The change between these two figures is then used to determine the increase for the next year. The monthly benefits are then increased by that percentage, and Social Security beneficiaries will see the increase in their Social Security checks starting in January. This applies to SSI recipients, retirement recipients, and SSDI recipients.
Remember that while Social Security cost of living adjustments cause the benefit payments to increase, there is no increase in the Social Security tax being collected. This means that the money in the Social Security trust funds gets depleted more quickly. While no one knows for sure what the future of Social Security holds, one potential solution is to reduce or remove the annual COLA increases. This solution has not been met with great enthusiasm, and it could put a big financial strain on many benefit recipients. Policy analysts think that this solution getting implemented is not likely, but it is still a possibility that is being considered.
2021 Increase In Social Security Benefits
Many people have already felt the effects of the big jump in consumer prices as a result of the Coronavirus pandemic that started in 2020. Prices have jumped across the board, and it seems that nothing has been left unscathed. Prices are higher for groceries, lumber, homes, automobiles, and almost everything else. Many people wondered, “Will Social Security get a raise in 2021?” The answer was yes; however, the Social Security COLA for 2021 was fairly modest at 1.3%. One reason for this is that the data used to calculate the increases is somewhat of a lagging indicator.
Remember from the section above how the annual COLA increase is calculated. CPI-W data from the third quarter of last year (assuming there was a COLA last year) is compared to third quarter data from the current year. The calculated increase then does not start hitting your bank account until January of the following year. So, this really means that you are getting your increase almost a year late. The increase that happened in 2021 was actually needed to pay for the rise in prices that occurred during 2020 and so forth. That is why many people are continuing to struggle this year. Prices have increased well above 1.3% during 2021, but another change to payments will not occur until January of 2022.
Projected Benefit Increase For 2022
The COLA estimate for 2022 shows that the increase in 2022 might be the largest increase in benefits since the 1980’s. That should come as no big surprise. Consumer prices during 2021 have increased across the board, and they have not increased just a little. In fact, they have increased dramatically. Many politicians and government officials are becoming increasingly concerned about inflation given this dramatic rise in prices. In fact, many are calling on the Biden administration to address inflation before it becomes even more of a serious problem.
As for the Social Security raise in 2022, expect it to be quite large. Some of the data used to calculate the increase has already been observed. In fact, one third of the data needed for the calculation is already set, and most estimates point to a COLA in 2022 of 6.2%. Mary Johnson, an analyst with The Senior Citizens League estimates that this will be the largest COLA increase since 1983 when it was 7.4%. This will be a welcome increase for many Americans who are struggling financially trying to keep up with rising prices.
Other Effects Of Social Security Increases
When looking at a COLA increase, benefit payments are not always the only thing to increase. This often brings about other increases that people might not be quite as excited about. For example, the Social Security tax limit generally increases each year along with benefit payments. This year was no different. In 2020, the wage limit for Social Security taxes was $140,000. However, that figure has increased to $142,800 in 2021. While this increase is not directly tied to the CPI-W like the benefit COLA is, the percentage increase is generally in the same ballpark. These tax limit hikes are necessary to continue collecting enough tax revenue to fund the increase in payments. Some have even suggested raising this limit much higher than it is currently to help keep Social Security solvent for many years into the future.
In addition, Medicare premiums often increase along with benefit payments as well. With the rising cost of health care, it is necessary for these premiums to increase for the program to be able to afford payment for health services. While many Medicare eligible Americans receive Part A coverage at no cost, they do pay a premium for Part B coverage and prescription drug coverage. Unfortunately, the rise in Medicare premiums often takes most of the COLA increase that retirees see in their benefit payments.
The Bottom Line
Automatic COLA increases for Social Security have been around since 1975, and they have become a necessity for benefit recipients to keep up with the rising cost of goods and services. While the COLA increase for 2021 was a meager 1.3%, the expected increase for 2022 is much higher. Most experts believe that the increase will be above 6%, and they believe that it will be the highest increase in almost 40 years. The dramatic and quick rise in consumer prices has led to this large increase. If inflation continues on its current path, another large increase might be in store for 2023. The 2022 COLA notices should be available through your mySocialSecurity account in December of this year so that you will be able to see exactly what the final increase for 2022 is.
Frequently Asked Questions
What will the Social Security increase be for 2022?
It is impossible to know exactly what the 2022 increase will be until the final CPI-W numbers are calculated. However, some of the data is already in that is needed for the calculation. Based on the estimates provided by most experts, it appears that the 2022 increase will be approximately 6.2%. This will be the largest increase in nearly 40 years, and many Social Security recipients will be anxiously awaiting this significant COLA increase.
Can Social Security benefits ever be reduced by a COLA?
Thankfully, no, your Social Security benefits cannot be reduced by a COLA. When Congress passed the original COLA legislation, it only accounted for increases in payments. There is no provision that would allow a decrease in benefits because of a COLA. If Congress decided to decrease your benefit payments, then it would require the passing of special legislation to implement a decrease. Congress ultimately decides how much Social Security pays. In years where the CPI-W might actually go down, then the Social Security benefit payments would simply stay the same.
Will Social Security be paid for by the government?
Technically, no, the government does not pay for Social Security. Social Security is funded through taxes collected from today’s current workers. So, although the money technically flows through the government, the taxpayers are wholly funding Social Security payments. Unfortunately, the benefit payments are currently exceeding the amount of taxes being collected. This is leading to a shortfall of funds and is causing the reserves in the Social Security trust funds to be depleted. Many people ask, “When will Social Security run out?” At the current rate, Social Security only has enough money to pay its current obligations through the year 2037. After that, it would only be able to pay about 76% of the benefits that would be due. For this reason, you can expect that Social Security changes are imminent, though no one knows for sure what those changes will be.
What happens if the Consumer Price Index does not change next year?
If the CPI does not change next year, then there would not be an increase in Social Security benefit payments. The annual COLA increase is tied to the consumer price index. If prices do not go up, then Social Security recipients will not see an increase in their benefits. A COLA will never cause your benefit payments to decrease, so you do not have to worry about that.