If you are a recipient of social security benefits, you will probably expect to increase your COLA benefits each year. Some years, however, do not lead to an increase in benefit payments. As prices rise, retirees often struggle to live on the same level of income. These COLA increases are necessary to help beneficiaries keep up with inflation and continue to maintain the same standard of living. So how much was the social security increase for 2021? We’ll give you all the details and discuss what you can expect to see in 2022. Read on to find out more.
What is COLA Social Security?
Adjusting the cost of living for social security increases benefit payments for retirees and beneficiaries with disabilities to adjust for inflation. When social security was first introduced, benefit payment amounts remained the same for about 20 years. Can you imagine not getting an increase in your income for 20 years? With inflation, the purchasing power of your dollar decreases almost constantly. Fortunately, Congress saw the need for an increase in payments and approved a one-time increase. The process stayed the same for another 20 years or so, with Congress having to approve increased benefits when necessary. This process became quite cumbersome and most Americans were tired of waiting for Congress to act when benefits were going to increase.
Therefore, Congress paved the way for automatic COLA increases in 1972. These automatic increases took effect in 1975. As consumer prices rise, so do benefit payments. Congress no longer needs to pass a special amendment to increase benefit payments to accommodate a higher cost of living. These annual COLA increases have been a welcome sight for Social Security beneficiaries as they try to keep up with the annual increase in the cost of living. Most retirees live on a fixed income, and inflation can really put a strain on your personal finances.
How is an increase in COLA calculated?
The annual increase is linked to the values of the consumer price index. 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, your retirement and disability benefits will increase 2% that year. On rare occasions, when the CPI may decrease, there will be no change in benefits. They will never decrease as a result of a COLA.
This is how the specific calculation for a Social Security COLA works. The data of the consumer price index are obtained. In particular, the consumer price index for urban and white-collar workers (CPI-W) is used in the calculation. The Social Security Administration (SSA) relies on the Bureau of Labor Statistics for this figure. The figure for the third quarter of last year in which there was an increase in COLA is compared with the figure for the third quarter of the current year. The variance between these two figures is then used to determine the increase for the following year. Monthly benefits then increase by that percentage, and Social Security beneficiaries will see their Social Security checks increase beginning in January. This applies to SSI recipients, retirees, and SSDI.
Remember that while Social Security cost of living adjustments increase benefit payments, there is no increase in Social Security tax that is collected. This means that the money in social security trust funds is depleted more quickly. While no one knows for sure what the future holds for Social Security, one possible solution is to reduce or eliminate annual COLA increases. This solution was not received with great enthusiasm and could put a lot of pressure on many benefit recipients. Political analysts believe that this solution is not being implemented, 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 huge jump in consumer prices after the coronavirus pandemic that began in 2020. Prices have jumped across the board and it seems like nothing has come out unscathed. Prices are higher for groceries, lumber, houses, cars, and just about everything else. Many people have wondered, “Will Social Security get a raise in 2021?” The answer was yes; however, the social security COLA for 2021 was quite modest at 1.3%. One of the reasons is that the data used to calculate the increases is, in some way, an indicator of lag.
Recall from the previous section how the annual COLA increase is calculated. The CPI-W data from the third quarter of last year (assuming there was a COLA last year) is compared with the data from the third quarter of the current year. The calculated increase doesn’t start arriving in your bank account until January of the following year. So, this really means that you are getting your raise almost a year late. The increase that took place in 2021 was actually necessary to pay for the price increase that occurred during 2020 and so on. That is why many people continue to struggle this year. Prices are up more than 1.3% in 2021, but there won’t be another change in payments until January 2022.
Expected profit increase for 2022
The COLA estimate for 2022 shows that the increase in 2022 may be the largest increase in profits since the 1980s. It shouldn’t be much of a surprise. Consumer prices during 2021 have increased across the board and have not increased slightly. In fact, they have increased dramatically. Many politicians and government officials are becoming more concerned about inflation due to this dramatic increase in prices. In fact, many are calling on the Biden administration to tackle inflation before it becomes an even bigger problem.
As for the increase in social security in 2022, expect it to be quite high. Some of the data used to calculate the increase has already been observed. In fact, a third of the data needed for the calculation is already configured and most estimates point to a COLA in 2022 of 6.2%. Mary Johnson, an analyst with The Senior Citizens League, estimates this will be the largest increase in COLA 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 Increases in Social Security
When looking at an increase in COLA, benefit payments are not always the only thing that increases. This often results in other raises that people may not be 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 salary limit for social security contributions was $140,000. However, that figure has increased to $142,800 in 2021. While this increase is not directly related to CPI-W as COLA advantage is, the percentage increase is generally in the same playing field. These increases in tax limits are necessary to continue raising sufficient tax revenue to fund the increased payments. Some have even suggested raising this limit much higher than it is today to help keep Social Security solvent for many years to come.
Also, Medicare premiums often increase along with benefit payments. As the cost of health care increases, these premiums must increase in order for the program to pay for health services. Although many Americans eligible for Medicare receive Part A coverage at no cost, they pay a premium for Part B coverage and prescription drug coverage. Unfortunately, the increase in Medicare premiums often absorbs most of the COLA increase retirees see in benefit payments.
The bottom line
Automatic COLA increases for social security have been around since 1975 and have become a necessity for benefit recipients to keep up with the rising cost of goods and services. While the 2021 COLA increase was a scant 1.3%, the expected increase for 2022 is much higher. Most experts believe the increase will be more than 6% and they believe it will be the highest increase in almost 40 years. The dramatic and rapid increase in consumer prices has led to this sharp increase. If inflation continues on its current path, there could be another big increase for 2023. COLA 2022 alerts should be available through your mySocialSecurity account in December of this year so you can see exactly what the final increase is for 2022.
Frequent questions
What will be the increase in social security for 2022?
It is impossible to know exactly what the 2022 increase will be until the final CPI-W figures are calculated. However, some of the data is already required for the calculation. Based on estimates provided by most experts, it looks like the 2022 increase will be around 6.2%. This will be the largest increase in nearly 40 years, and many Social Security beneficiaries will be looking forward to this significant increase in COLA.
Can Social Security benefits ever be reduced by a COLA?
Fortunately, no, Social Security benefits cannot be reduced by a COLA. When Congress passed the original COLA legislation, it only considered payment increases. There is no provision that allows a decrease in benefits due to a COLA. If Congress decides to reduce subsidy payments, it would be necessary to pass special legislation to implement a reduction. Congress ultimately decides how much Social Security pays. In years when the CPI-W might actually decline, Social Security benefit payments would simply stay the same.
Will the government pay for social security?
Technically no, the government does not pay social security. Social security is financed through taxes collected from current workers. So even though the money technically flows through the government, the taxpayers fund the Social Security payments entirely. Unfortunately, benefit payments currently exceed the amount of taxes collected. This is causing a shortage of funds and leading to the depletion of reserves in social security trust funds. Many people ask, “When will Social Security expire?” At the current rate, Social Security only has enough money to pay its current obligations through the year 2037. After that, it could only pay about 76% of the benefits that would be due. Because of this, you can expect changes to Social Security to be imminent, although 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, there would be no increase in social security payments. The annual increase in the COLA is linked to the consumer price index. If prices don’t go up, Social Security recipients won’t see an increase in their benefits. A COLA will never lower your benefit payments, so you don’t have to worry about that.