Social Security News: Cost-of-Living Adjustment

Interview by Heidi Frankel ~

fyi50+: Over the past month, I’ve read about the cost-of-living adjustment for Social Security in 2022. David, could you provide some background and details about these rumored changes to the system next year?

David Freitag: One of the key components of Social Security retirement benefit is the annual adjustment for cost-of-living increases. Introduced in 1975, these annual increases help retirees adjust to higher costs for things like food, transportation, utilities, and other lifestyle needs. See the Cost-of-Living Adjustment (COLA) Information from the Social Security Administration website.

In a study completed this year by the MassMutual Life Insurance Company, 82% of the 1500 people interviewed knew benefits automatically increase to adjust for these higher costs of goods and services.

However, in the past few years, the importance of the COLA increase has been overlooked by many of us because the size of the increases has been small. In 2015, the increase was 1.7%; in 2016, it was actually 0.0%; in 2017, it was 0.3%; and, in 2018, it was 2%. The increase in 2019 was more significant at 2.8% but dropped in 2020 to 1.6%. This year, the 2021 increase reduced again to 1.3%.

Because these increases have been small, along with corresponding increases to Medicare Part B and Part D premiums, most retirees have not seen significant changes in their Social Security payments. It looks like that is not going to be the case in 2022.

Rumors say the 2022 increase will be one of the largest in history—perhaps up to 5%.

We will not know for sure the exact amount of the 2022 increase until October or November of this year. For someone with a $2,000/month benefit now, the new benefit amount next year might be more than $100/month.

Good news about these increases: They do not require Congressional action or approval to take place. The adjustments are built into the law and automatically happen if there is a corresponding increase to the cost of living.

The 2022 increase will be welcome news and should reemphasize the value of a COLA-adjusted increasing income stream in retirement. When you apply a long-term, year-over-year increase to retirement benefits, the numbers are dramatic.

Consider a married couple, both 65, with a $3,000 combined monthly benefit and a life expectancy to age 90. The cumulative benefit without any COLA adjustments would be just under $800,000. The cumulative lifetime benefit with a 2.0% year-over-year COLA adjustment would be more than $1,000,000. If the year-over-year COLA adjustment increased to 2.5%, the cumulative lifetime benefit would be about $1,100,000. If their life expectancy increased to 95, the 2.5% cumulative benefit would be more than $1,400,000.

If someone stopped by your house with a suitcase of cash worth $1,400,000, it would be an exciting day. For most of us, that suitcase of cash is our Social Security benefits. That suitcase is a very important source of guaranteed income in retirement. When you add the COLA adjustments, it becomes even more important.

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