Based on new data for July, it’s starting to look like next year’s annual Social Security cost-of-living adjustment may be the highest in nearly four decades.
The new, updated estimates from The Senior Citizens League (TSCL) show that the annual COLA could be 6.2% next year, based on July Consumer Price Index (CPI) data released Aug. 11 by the Bureau of Labor Statistics.
According to the BLS’s data, the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5% in July on a seasonally adjusted basis after rising 0.9% in June. Over the last 12 months, the all-items index is up 5.4% before seasonal adjustment. In addition, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)—which is used for the Social Security COLA—increased 6% over the last 12 months. For the month, the index rose 0.5% prior to seasonal adjustment.
“The estimate is significant because the COLA is based on the average of the July, August and September CPI data,” says Mary Johnson, a Social Security policy analyst for The Senior Citizens League. “With one third of the data needed to calculate the COLA already in, it increasingly appears that the COLA for 2022 will be the highest paid since 1983 when it was 7.4%,” Johnson adds.
In comparison, the Social Security COLA for monthly Social Security and Supplemental Security Income (SSI) benefits increased by 1.3% in 2021, 1.6% in 2020 and 2.8% in 2019. Social Security benefits are one of the few types of income in retirement adjusted for inflation.
Last month, TSCL predicted that Social Security recipients may get a 6.1% COLA in 2022, and in May, the organization predicted that recipients may get a 4.7% COLA, which would have been the highest increase since 2009.
Each October, the Social Security Administration announces the annual COLA for the year, which provides an early precursor of what can be expected for COLAs on retirement plan contribution and benefit limits.
What’s Driving the Increase?
TSCL explains that, under current law, Social Security benefits are adjusted using the CPI-W. That index measures inflation experienced by younger working adults, but it does not include the spending patterns of households with retirees age 62 and older.
The organization notes, for instance, that the CPI-W is weighted more heavily for gasoline, which is up 41.8% over the past 12 months and thus driving the steep rise in the COLA. In 2020 and most of the past 12 years, however, gasoline prices have been in steep decline, so COLAs have averaged just 1.4%.
In advocating for the use of a different index, TSCL contends that retired and disabled Social Security beneficiaries spend their money differently than younger workers, spending more on health care and housing. The organization further notes that in recent years those categories have increased more rapidly than gasoline but haven’t shown up as higher COLAs because the CPI-W is weighted less heavily for them.
Legislation that would tie COLAs to an index that measures inflation experienced by older households, the Consumer Price Index for the Elderly (CPI-E), was reintroduced recently. Typically, the CPI-E tends to grow more quickly that the CPI-W in most, but not every, year. “2021 is one of those times when gasoline prices soar and the CPI-W would yield the higher COLA,” Johnson notes.
The CPI for August 2021 is scheduled to be released on Sept. 14, which will provide even more clarity on what the 2022 COLA will be.