Personal Finance

What Inflation Means for Social Security Checks in 2022

What Inflation Means for Social Security Checks in 2022

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What do the latest inflation figures tell us about what the annual Social Security benefits adjustment is likely to be in January 2022?

A quick answer to this question is that there will be an inflation adjustment to Social Security benefits beginning in that month. It will almost certainly be much higher than the 1.3% increase for 2021, but it is hard to know right now how high it will be.

In the early 1970s, an inflation adjustment was added to the Social Security program to protect beneficiaries from increases in inflation.

This inflation adjustment, also known as a cost-of-living adjustment (COLA), is tied to the change in the federal Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

The Social Security inflation adjustment for a given year reflects the change in the index during the four quarters ending in September of the prior year.

This means that Social Security beneficiaries will receive an increase in benefits in January 2022 based on the change in the index from the third quarter of 2020 through September 2021.

This week, the government released figures for the monthly inflation increase in April. Prices for urban consumers as a whole increased 4.2% over the prior 12 months.

On the one hand, this may be misleading when thinking about the increase in Social Security benefits, because this is an increase in prices between April 2020 — when prices were falling due to the pandemic — and April of this year, when the economy is recovering.

Still, if we look back to September 2020, we see that prices have already risen by approximately 1.9%.

The biggest Social Security increase in 10 years?

The inflation adjustment in Social Security benefits was only 1.3% this past January and has not exceeded 2.8% in any year since 2011. That means the adjustment in January 2022 is likely to be the largest increase in 10 years.

The average monthly benefit for all retired workers in 2021 is $1,543. An increase in benefits of 1.9% would increase this benefit to about $1,572. Under the likely scenario that the inflation adjustment will be even higher than this, the increase in benefits will be even greater.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) measures the change in prices of a “market basket” of goods and services that such consumers buy. But the market basket of goods typically consumed by older Americans can differ from the market basket of goods consumed by workers. For example, older Americans consume more medical services than younger people.

This year, the index might be further distorted as a cost-of-living measure because of the changing market basket of goods people have been buying during the pandemic.

There is an experimental index — the Consumer Price Index for the Elderly (CPI-E) — which attempts to measure inflation of a market basket of goods purchased by the elderly, but it has never been used to calculate the Social Security inflation adjustment. Nonetheless, the Social Security Administration has done a calculation of the effect of the CPI-E where the CPI-E increases faster than the CPI-W by 0.2% annually.

This might not seem like a big difference, but over a period of 20 years — which is a period over which many people would be collecting benefits — the benefit would be 4% higher, which is greater than the benefit adjustments over the past two years.

If you are paying for Medicare out of your benefit check, these inflation adjustments are not fully reflected in your benefit check. There will also be an adjustment in your Medicare premium that is subtracted from your benefit. This premium adjustment is based on the increased cost of the Medicare program.

Got a question you’d like answered?

You can submit a question for the “Social Security Q&A” series for free. Just hit “reply” to the Money Talks News newsletter and email your question. (If you don’t already receive the newsletter, you can sign up for free, too: Click here, and the sign-up box will pop up.)

You also can find all past answers from this series on the “Social Security Q&A” webpage.

About us

We were colleagues at the University of Delaware in the Department of Economics. In 2009, we co-founded, an internet company that provides advice on Social Security claiming decisions. You can learn more by clicking here.

Disclaimer: We strive to provide accurate information with regard to the subject matter covered. It is offered with the understanding that we are not offering legal, accounting, investment or other professional advice or services, and that the SSA alone makes all final determinations on your eligibility for benefits and the benefit amounts. Our advice on claiming strategies does not comprise a comprehensive financial plan. You should consult with your financial adviser regarding your individual situation.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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