Official 2022 COLA Released! (SSI, SSDI, VA)

The Social Security Administration announced October 13th that its annual cost-of-living adjustment (or COLA) will be 5.9 percent, which will provide a boost to average retirement benefits of about $92 per month for individuals, and will be taking effect in January.​ The 2022 COLA is the largest increase to Social Security benefits since the 7.4 percent hike that went into effect in January 1983. Until this year, COLAs have been a lot lower, averaging a measly 1.65 percent increase annually over the past decade, with no gain at all to benefits in 2016. The increase that went into effect in January 2021, for example, was only 1.3 percent.

According to AARP Chief Executive Officer Jo Ann Jenkins, “Today’s announcement of a 5.9 percent COLA increase, the largest increase in four decades, is crucial for Social Security beneficiaries and their families as they try to keep up with rising costs. The guaranteed benefits provided by Social Security and the COLA increase are more crucial than ever as millions of Americans continue to face the health and economic impacts of the pandemic. Social Security is the largest source of retirement income for most Americans and provides nearly all income (90% or more) for 1 in 4 seniors”.​

The annual Social Security COLA is calculated based on the change in prices of a market basket of goods. To measure these changes, the Social Security Administration uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (or CPI-W).​ For the 2022 COLA, the Social Security Administration measured the change in the average CPI-W index from July, August and September of 2020 to the average CPI-W index for the same three-month span in 2021. The percentage change between the two quarterly averages is what the final COLA will be. So for example, if you had a 1% average CPI-W index in the 3rd quarter of last year and 3% this year, the 2022 COLA would instead be 2%.​ The COLA was significant this year, largely due to the sudden rising prices of goods and services in the past year, as a result of extreme weather and COVID-19 outbreaks, which have driven up energy prices and put a damper on the world’s supply chains.​

Ever since Congress first initiated automatic annual COLAs in 1975, there have actually been three years in which benefits didn't increase at all: 2010, 2011 and 2016. The single biggest increase in history was as high as 14.3 percent, which went into effect in January of 1981.​ The way Social Security is funded is by a payroll tax of 12.4 percent on eligible wages. Employees pay 6.2 percent, while employers pay the other 6.2 percent. Self-employed workers, on the other hand, are paying the entire 12.4 percent. Next year, the maximum amount of wage earnings subject to the Social Security tax will increase to $147,000 from $142,800 in 2021. The money paid in by today's workers goes to cover current benefits, with any excess going into the Social Security Trust Fund.​ Due to the fact there are fewer workers relative to the growing number of Social Security beneficiaries, the Social Security system is facing increased pressure to make changes.

In their 2021 annual report, Social Security's Trustees estimated that if no legislative action is taken, the trust fund for retired workers and their survivors will run short of money in 2033. Despite this concern, we have provisions in our legislation that allows for over three-quarters of benefits to still be paid out from incoming payroll taxes. Moreover, a separate Trust Fund that pays disability benefits is projected to run out of money in 2057.​ To make things worse, most Social Security recipients will likely see their COLA increase partially canceled out by an increase in the cost of Medicare. Medicare Part B premiums, which cover physician visits and outpatient medical services, are typically deducted directly from Social Security benefit payments.

So the question becomes how much will Medicare eat into my Social Security payments? And unfortunately the answer will have to wait. The 2022 monthly premium for Medicare Part B recipients has yet to be announced. However, to give you a rough idea, the standard premium in 2021 was $148.50 per month. And for 2022, an increase of about $10 in Medicare premiums was projected, for a grand total of almost $160 a month.

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