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Social Security Benefits Could Skyrocket Next Year

Social Security recipients could see benefits surge next year because of inflation. In June, the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, increased 6.1% versus one year ago, suggesting that retired workers could see the biggest cost-of-living increase to monthly benefits in decades.

We won't know exactly how much Social Security will increase next year until October, but based on June's inflation data, the cost of living adjustment (COLA) in 2022 could top 6% for the first time since 1982.

IMAGE SOURCE: GETTY IMAGES.

How Social Security calculates COLA

Social Security's COLA calculation is pretty straightforward. Every year, it compares the monthly CPI-W figures for the third quarter to the third-quarter figures from the most recent year in which a Social Security increase was awarded. Since recipients received a 1.3% COLA increase in 2021, this year's figures will be compared to the third-quarter data from 2020.

If this year's third-quarter CPI-W is higher than it was last year, then Social Security will increase recipients' benefits by the exact percentage of the CPI-W increase. If the CPI-W is equal to or lower than last year, then Social Security will remain unchanged in 2022.

So far, so good

Although retirees won't know if they'll be awarded an increase in 2022 until fall, CPI-W has been increasing dramatically this year, and inflation appears to be accelerating. June's 6.1% increase follows a 5.6% increase in May and a 4.7% increase in April. In the second quarter, the CPI-W's average was 5.5% higher than the second quarter of 2020.

If June's increase is matched by third-quarter data, then the resulting 6.1% increase in Social Security benefits would outpace anything recipients have seen in recent memory. For example, the average Social Security increase over the past 10 years has been just 1.7%. Furthermore, Social Security has only increased by over 5% because of COLA twice since 1990 -- a 5.4% increase in 1990 and a 5.8% increase in 2008.

Consumer Price Index for Urban Wage Earners
and Clerical Workers (CPI-W)
Year April May June Average
2020 249.515 249.521 251.054
2021 261.237 263.612 266.412
Percent Change YOY 4.7% 5.6% 6.1% 5.5%

Data source: Social Security Administration. YOY = year over year.

It's not all good news, though

It's certainly welcome news to learn Social Security benefit checks could be getting bigger, but tying seniors' COLA increase to CPI-W, rather than a measure that more accurately reflects retirement spending, has left retirees in a bind.

According to The Senior Citizens League, increases in CPI-W have lagged inflation in goods and services purchased by retirees, such as healthcare. As a result, the non-profit estimates seniors' buying power has slipped by 30% since 2000, despite Social Security's annual COLA increases.

One way to close the gap between real retirement costs and COLA would be to shift the inflation measure used in Social Security's calculation from CPI-W to CPI-E, an inflation gauge based on spending by individuals age 62 or older. Earlier this month, California Congressman John Garamendi introduced a bill to the House of Representatives to do that, but only time will tell if Congress supports the change.

In the meantime, embracing Social Security planning strategies designed to maximize retirement income remains critical to achieving financial freedom in retirement.

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