What Does The Largest Social Security COLA Increase In 40 Years Mean For Your Retirement?


Americans receiving Social Security benefits in 2022 will see the largest increase in their payments in four decades, according to the Social Security Administration. The 5.9% cost-of-living adjustment (COLA), announced in mid-October, will translate to an additional $92 for retirees’ average monthly benefit next year, bringing that estimated amount to $1,657. While that’s a significant increase over the 1.3% COLA that went into effect in January 2021—and is certainly good news for those seniors who rely on Social Security benefits for all or a portion of their income in retirement—it comes with a caveat. The increase is driven by the steep rise in inflation over the last 12 months, which reduces the buying power of consumers, especially those living on fixed incomes in retirement.

How does inflation factor in?

In October, the U.S. Department of Labor (DOL) announced that its broader measure of inflation, the consumer-price index, rose 5.4% in September from a year earlier, marking the largest annual gain since 2008. According to the DOL, prices have increased significantly from a year ago for gas (+42.1%), used cars (+24.1%), furniture (+11.2%), appliances (+7.1%), and meat, fish, poultry and eggs (+10.5%), among other consumer goods. As a result, much of the Social Security COLA increase will be absorbed by the rising cost of goods and services and the projected annual increase in Medicare Part B premiums, which rise from $148.50 in 2021 to $158.50 in 2022. For most retirees, Medicare Part B premiums are automatically deducted from their monthly Social Security benefit payments.

Keep in mind, higher income taxpayers may be subject to the Medicare Income-Related Monthly Adjustment Amount (IRMAA). This is an amount you may pay in addition to your Part B or Part D premium if your income is above a certain level. The Social Security Administration (SSA) sets four income brackets that determine your (or you and your spouse’s) IRMAA. SSA determines if you owe an IRMAA based on the income you reported on your IRS tax return two years prior, meaning two years before the year that you start paying IRMAA. The income that counts is the adjusted gross income you reported plus other forms of tax-exempt income. If you are expected to pay IRMAA, SSA will notify you that you have a higher Part B premium. For more information on how to plan for IRMAA, download our free IRMAA Worksheet.

What’s driving inflation?

The Wall Street Journal reports that consumer prices have risen at the fastest rate in more than a decade because trillions of dollars in economic stimulus have supported consumer demand at a time when supplies for everything from toilet paper to new cars have been constrained due to pandemic disruptions. If disruptions in the supply chain prove to be temporary, we could see inflation ease, which could result in Social Security beneficiaries keeping more of their monthly increase in 2022. The opposite is true if inflation continues to climb in the months ahead. Pressure on employers to raise wages to fill jobs is also pushing prices higher.

While Federal Reserve Chairman Jerome Powell still believes inflation will be transitory, he recently cautioned that the causes of the recent rise in inflation may last longer than anticipated.

Why does inflation matter?

For many retirees, Social Security is their only sources of income in retirement that is adjusted for inflation. While state and federal pensions are typically adjusted for inflation, most private pensions are not, according to the Pension Rights Center. And in a low interest rate environment like we’re experiencing today, earnings from sources such as certificates of deposit (CDs), money market funds or short-term bonds can’t outpace the rate of inflation.

While it remains to be seen, whether we’re entering a period of sustained higher prices—or if inflation will be temporary, there are ways to help manage the impact on your purchasing power.

Consider the following steps: 1.

  1. Revisit your budget. If you’re spending more on essential expenses due to rising prices for food, healthcare, clothing, or transportation, consider if there is room to cut back on certain non-essential, discretionary expenses. These are the things that you may want but are not essential to daily living, such as dining out/carryout, entertainment, hobbies or travel. Start with the things you may be paying for but may not be fully utilizing, like certain online subscriptions or streaming services. To make it easier, put technology to work. Apps like Truebill promise to help you identify subscriptions you may have forgotten about and cancel them. And don’t be afraid to negotiate with cable, internet or cell phone providers. Many will provide discounts or credits to retain existing customers who ask.
  2. Review your asset allocation. An investment portfolio allocation that’s too conservative may not generate the income you need. For example, based on the current rate of inflation, your portfolio would need to earn more than 5.4% to generate enough income to outpace inflation. If you’re earning less, you won’t be able to afford the same goods and services that you did when inflation was lower. Consider if it makes sense to allocate a larger percentage of portfolio assets to growth-oriented investments which help to provide a hedge against inflation over the long term.
  3. Follow a plan. The financial planning process takes inflation and other market and economic factors into account when modeling different strategies and scenarios. Planning can help ensure you have a flexible strategy in place that’s aligned with your income and spending goals that can be adjusted as market and economic conditions change over time. That can help make sure you’re positioned to pursue all of your goals under any market or economic circumstances.

To learn about ways to manage Social Security and taxes and how different claiming strategies can help you optimize your income in retirement, download our complimentary guide: Maximize Social Security Benefits & Minimize Tax Burden.

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