2022 Social Security COLA could be as high as 6%

The COLA is expected to be one of the largest since 1983.

(Photo: Shutterstock)

The annual cost-of-living adjustment, or COLA, for Social Security benefits in 2022 — usually announced in October — could be 6% to 6.1%, the highest since 1983, based on Tuesday’s Consumer Price Index announcement, according to Social Security and Medicare policy analyst Mary Johnson of The Senior Citizens League, who estimated the 2022 COLA would be 6.2% a month ago.

The latest estimate, which is based on inflation of 0.3% in August, is especially significant as next year’s COLA will be calculated on the average of third-quarter, or July, August and September, CPI data.

“This year is particularly difficult to forecast with certainty,” Johnson said in a statement, noting that inflation patterns caused by the COVID-19 pandemic are “unprecedented” in her experience. “Price changes due to climate disasters throw a monkey wrench into things on top of the difficulty in watching run up in costs earlier this year,” she said.

The consumer price index for all urban consumers in August rose 5.3% over the past 12 months, and 0.3% from the previous month, the Labor Department reported Tuesday. (The CPI includes food and energy.)

Economists polled by Bloomberg had forecasted a 0.4% month-over-month increase and a 5.3% increased compared with a year earlier.

Key components of the increase included the energy index, which rose 2% from the previous month, mainly due to the gasoline index, which rose 2.8%, electricity, which rose 1.0% and natural gas, which rose 1.6%. The food index rose 0.4%, and new vehicle prices increased 1.2% from the previous month.

August’s core CPI, which excludes food and energy, rose by 0.1% from July — its smallest increase in five months — and 4.0% from a year ago, according to the BLS. (In July, the core CPI was up 0.3% from June and 4.3% from a year earlier.)

Johnson added: “Based on the new data through August, there’s a downward inflation trend. Although my calculator indicates the COLA could be 6.1%, the chances of inflation remaining high enough for that to occur is only 10 percent based on 20 years of historic trends. The data dropping to 6 percent are twice that high, 20 percent. … With the July and August consumer price data, inflation is plateauing.”

Social Security Trust Fund status not as dire/?

Meanwhile, the Social Security Old-Age and Survivors Insurance Trust Fund is on track to be depleted by 2033, a year earlier than estimated in 2020, with 76% of benefits payable at that time, according to the 2021 Social Security Board of Trustees’ report, released in late August.

The Disability Insurance Trust Fund, meanwhile, was projected to be able to pay scheduled benefits until 2057, eight years earlier than last year’s projection. At that time, the report states, the fund’s reserves will be depleted and continuing tax income will be able to pay 91% of scheduled benefits.

Despite the Social Security trust fund’s reserves at the end of 2020 being $2.9 trillion, having increased by $11 billion, there were a variety of factors driving the estimate, the Trustees state.

The report notes that both Social Security and Medicare will face long-term financing shortfalls under “currently scheduled benefits and financing.” Further, both will experience substantial cost growth into the 2030s due to “rapid population aging.”

The finances of both programs have been “significantly affected by the pandemic and the recession of 2020,” the report states. “Employment, earnings, interest rates, and GDP dropped substantially in the second calendar quarter of 2020 and are assumed to rise gradually thereafter toward full recovery by 2023, with level of worker productivity and thus GDP assumed to be permanently lowered by 1 percent even as they are projected to resume their pre-pandemic trajectories.”

The Trustees also noted that elevated mortality rates related to the pandemic through 2023, as well as reductions in immigration and childbearing in 2021-2022 from projected levels in the 2020 report, all affected the projections.

But this is better than some retirement experts feared at the height of the pandemic.

“The news from the new report was definitely less dire than many thought could be possible,” Wade Pfau, professor of retirement income at The American College of Financial Services, told BenefitsPRO’s sister site ThinkAdvisor in an email. ”Last year’s report projected that the combined OASDI funds could be depleted by 2035. During the pandemic, there was analysis circulated that this date could be moved to as early as 2029. In the end, it’s only one year sooner at 2034.”

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