The pain of inflation is often harshest on the budgets of retirees on fixed incomes. The only bright light of the recent spike in the consumer price index is the potential for a more significant Social Security cost-of-living adjustment (COLA) this year. Estimates of the Social Security COLA in 2021 (for 2022) have been in the range of 5.3 to 6.1%. We have not seen a cost-of-living adjustment at this level since 2009.
The 2021 Social Security cost-of-living adjustment will not kick in until January 2022. So, retirees may see their budgets stretched thin over the next six months. Rental prices are jumping; groceries are costing more, real estate prices have gone crazy don’t even get me started on health care and long-term care.
The 5.3% Social Security COLA estimate was calculated by The Senior Citizens League, a non-partisan senior group, and based on consumer price index data from the Bureau of Labor Statistics through May. In June, the group updated its estimate to 6.1%, which would be the biggest Social Security COLA since 1983.
The last time a Social Security cost-of-living adjustment was more than five percent was in 2009. Sadly, that jump in benefits was followed by two years of no increases in Social Security benefits. The 2020 COLA for Social Security increased 2021 SS benefits by just 1.3%.
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The Social Security Administration typically announces the annual Social Security COLA rate during the month of October. The SS COLA is based on the average rate of inflation over the prior three months. Depending on who you ask, we could see an acceleration of the inflation rate, or price pressures could begin to recede. Don’t go out and make major spending choices based on a potentially high Social Security COLA. I am optimistic inflation will return to closer to normal levels over the long term. In the short-term, there is so much pent-up demand (due in part to people being stuck at home during COVID); therefore many areas of the economy will most likely continue to have increased prices.
How Much Will Social Security Benefits Increase?
The amount your Social Security check will increase will be based on a combination of your underlying benefit and the Social Security COLA. Assuming the Social Security cost-of-living adjustment is at the 6.1% level for 2022, and you are receiving the maximum Social Security benefit of $3,895, you would get an additional $237.60 per month. This would mean an increase of $2,851.14 per year.
The jump in benefits will be a bit more modest for those receiving the average Social Security benefit in 2021. Social Security benefits averaged just $1,543, per month, in 2021. Again, assuming a 6.1% SS COLA, you could see your retirement benefits increase by $94.12 per month. When living on a fixed income, that additional $1,129.48 can go a long way.
For those of you who are still working, make sure you have other retirement income to help maintain your standard of living. Even at the maximum Social Security benefit, you will have a tough time keeping your standard of living on Social Security alone. Work with a trusted financial planner to help determine the optimal time to claim Social Security and to help maximize your benefits.
Currently, 69 million Americans are collecting Social Security Benefits. So a significant increase in the Cost of Living Adjustment to Social Security will be huge for the budgets of many retirees.