Why your social security income could increase by 5% (or more) in 2022

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In October, Social Security could give retirees the biggest increase in benefits since the 1980s. On Tuesday, the Bureau of Labor Statistics updated the key measure of inflation – CPI-W – used by Social Security to determine annual increases in the cost of living.

The latest figures, which reflect active household spending on goods and services in August, suggest that social security benefits could increase by more than 5% in 2022. Here’s how Social Security calculates its annual increase and what an increase can mean for the average retiree.

IMAGE SOURCE: GETTY IMAGES.

How social security works

Social Security is awarded to retired workers who accumulate 40 credits. These credits are given to people in jobs subject to payroll taxes, and workers can earn up to four credits each year. In 2021, one credit is given for every $ 1,470 of income subject to payroll taxes, so you will need to earn $ 5,880 to receive all four credits this year.

Once you have accumulated your 40 credits, you can start collecting social security from the age of 62. However, you will only receive 100% of your monthly benefits if you wait until full retirement age, or FRA, to claim them.

FRA varies depending on your year of birth, but if you were born after 1954, the age ranges between 66 and 67. In 2021, the full retirement age for people aged 62 is 66 years and 10 months.

Social Security is designed to replace about 40% of the average income before the retiree’s retirement. However, low-income people might see a higher percentage of their income replaced than higher-income people because of so-called bend points, which limit the amount of historical income you can use in the calculation of your benefits.

Prior to 1975, Social Security cost-of-living (COLA) adjustments were granted by congressional legislation to ensure that Social Security benefits did not lose their purchasing power due to inflation. Since then, COLA increases have been determined by changes in the Consumer Price Index for urban and office workers, or CPI-W, a common inflation measure calculated monthly by the Bureau of Labor. Statistics.

To determine whether or not to assign an annual COLA, Social Security compares the monthly CPI-W data for the third quarter of the current year to the third quarter of the most recent year in which a social security increase was last awarded. Because a COLA was awarded last year, this year’s CPI-W will be compared to Q3 2020 numbers.

If the CPI-W for the third quarter of this year is higher than the figures for last year, the benefits of social security recipients will increase by the exact percentage change in the CPI-W. If the CPI-W is unchanged (or lower), your benefits will remain at 2021 levels. As a perspective, in 2020, the third-quarter CPI-W increased 1.3% from the third quarter of 2019, so benefits payable in 2021 have been increased by 1.3%.

How is COLA preparing for 2022?

We won’t know for sure whether the Social Security Administration will grant a COLA until the September CPI-W is reported in October. However, CPI-W readings over the past three months suggest that an increase is on the table, and if so, it could be significant.

The August CPI-W was 5.8% higher than a year ago and since June the average CPI-W is 5.98% higher than the same three-month period in 2020 If these were the latest figures for the third quarter, then the corresponding 5.9% increase in retiree benefits would be the largest COLA granted since a 7.4% increase was granted in 1982.

Consumer price index for urban workers
and office workers (CPI-W)
Year June July August Mean
2020 251,054 252,636 253,597 252,429
2021 266,412 267,789 268,387 267,529
Percentage change over one year 5.98%

Data source: Social security administration. YoY = year after year.

An elderly couple looking at a laptop in their kitchen.

IMAGE SOURCE: GETTY IMAGES.

What this means for the average retiree

No one will complain too loudly about a 5.9% increase in retirement income, but we have to keep in mind that the average Social Security recipient pocketed $ 1,558 a month in August, so a lot people will see an increase of less than $ 25 per week.

More disheartening, however, is that much of this increase could cover higher costs for everyday goods and services, including energy and healthcare. For example, the electricity CPI index was 5.2% higher year over year in August, and the natural gas index rose more than 21% over a year. year to year last month.

Also, we won’t know if Medicare Part B premiums will increase until the end of the year. Most retirees see these premiums automatically deducted from their Social Security checks, and in 2021, premiums rose 2.7%. If Part B premiums increase again this year, a large chunk of the Social Security COLA price could be needed to cover your health costs in 2022.

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