Rising inflation is expected to lead to a sizeable increase in Social Security's annual cost-of-living adjustment, or COLA, for 2022. Exactly how much will be revealed Wednesday morning after a Labor Department report on inflation during September, a data point used in the final calculation. Over the last 10 years, the Social Security COLA has averaged about 1.7% annually as inflation remained low. But the economic recovery from the coronavirus pandemic has triggered rising prices for a wide range of goods and services, and that's expected to translate to bigger checks for retirees. From the AP:
- Why are Social Security benefits adjusted? Policymakers say the COLA works to preserve the purchasing power of Social Security benefits, and shouldn’t be seen as a pay hike for retirees. At one time Congress had to approve inflation increases, but starting in the mid-1970s lawmakers turned that function over to nonpartisan experts within the government bureaucracy.
- How big an increase for 2022? Stay tuned. The Great Recession saw a COLA increase of 5.8% for 2009, and the number for next year may rival that. This summer, government economic experts predicted a COLA in the range of 6%. If that's the case, it would be the biggest Social Security hike the vast majority of baby boomer retirees have seen. Up to now, they've collected meager to modest annual adjustments, not counting three years for which there was no COLA because inflation barely showed a pulse. A 6% COLA would increase the average Social Security payment for a retired worker by close to $93 a month, to $1,636 next year. Compare that to this year's COLA, worth only about $20 a month.
- What's changed over the past year? As the economy recovers from the shock of coronavirus shutdowns, prices are rising at a pretty good clip. Gas serves as an ever-present reminder, above $3 a gallon in most states, $4 a gallon in California and Hawaii. But food had already been going up and so are labor costs as employers compete to hire workers seeking higher pay and better benefits. Add to the mix supply chain problems that have slowed deliveries of everything from refrigerators to running shoes.
- Who's affected? The COLA is big enough to have an impact on the overall economy. It affects the household budgets of about 1 in 5 Americans, including Social Security recipients, disabled veterans and federal retirees, about 70 million people. About half of seniors live in households where Social Security benefits account for at least 50% of their income, and one-quarter rely on their monthly payment for all or nearly all their earnings.
- Do private pensions also provide a COLA? Inflation protection is central to Social Security's benefit design, but it's not so common among traditional private pensions. Benefits paid by most employer plans gradually lose some of their purchasing power over the years.
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