Earlier this year, there were rumblings that the 2022 Social Security cost-of-living adjustment (COLA) would be historically large. Specifically, The Seniors Citizen’s League’s (TSCL) Social Security and Medicare policy analyst, Mary Johnson, predicted it to be as high as 4.7 percent, which would be the largest COLA since 2009. Now Johnson is predicting the COLA may be even larger, reaching a level that hasn’t been seen since 1983.
The adjustment is generally announced in October, before going into effect in January of the next year and influencing the Social Security checks that millions of Americans rely on for their financial well-being. The Social Security administration determines the COLA using several factors that can be tracked and used to fairly accurately predict the COLA each year. Using this data, experts are now beginning to believe that the initial predictions may have been on the low end!
The August 11 Consumer Price Index (CPI) announcement saw the inflation rate rise to 5.4 percent and caused many experts to rethink their initial assessment of where the COLA may fall this October. Now, the signs are pointing toward a potential COLA of 6.2 percent! As we mentioned earlier, this would be the highest COLA since 1983, when it was 7.4 percent. It would also place it in line with the average COLA seen in the in the 1970s and early 1980s, when an entirely different calculation was used.
“Now with one third of the data needed to calculate the COLA already in, it increasingly appears that the COLA for 2022 will be the highest paid since 1983 when it was 7.4 percent” — Mary Johnson, TSCL Social Security and Medicare policy analyst, said in a TSCL press release
This most recent report is extra important because it will directly influence the 2022 COLA, which takes the CPIs of July, August, and September into account. CNBC reports that rising inflation plays a large part in the increasing of the COLA estimates.
Since these are only estimates, it’s possible that the COLA could — and likely will — change before the official number is announced in October. In fact, this isn’t the first time a prediction has changed, with Johnson predicting a COLA of 6.1 percent in early July — calling it “the highest COLA I’ve ever estimated in my 26-plus years of researching the annual inflation adjustment.” Before that, her prediction of 4.7 percent was triple her earlier estimate of 1.5 percent only 90 days prior. Currently, the estimates have only been heading in one direction, but that doesn’t mean they will continue to.
We previously mentioned that this would be the largest COLA increase since 1983, but it’s important to put into context how large this increase would be. Last year’s COLA (2021) was 1.3 percent. This would make a 2022 COLA of 6.2 percent nearly five times larger. Compared to the rest of the COLA’s history, this increase is even more significant. The lifetime average COLA is 3.6 percent, though this is inflated by the COLAs from 1975 to 1982 — which average 8.7 percent. The annual COLA has averaged 2.1 percent since 2000, meaning the predicted 2022 COLA is around triple the average since the turn of the century.
The predicted 2022 COLA of 6.2 percent would also be the eighth highest COLA ever — and the largest if you remove 1975 to 1982. The formula for calculating the COLA changed in 1983. This is why the COLAs before 1983 were so large comparatively and why there wasn’t a COLA in 1983. For more information on the historical context of the COLA numbers, see the table below.
The annual COLA is one of the ways what you pay in Medicare (primarily the Medicare Part B premium) can change from year to year. This is due to health care costs increasing alongside other costs of living. Depending on what the COLA is, the premiums for Medicare Part B may increase to cover these added health care costs. If your Part B premiums are taken directly out of your Social Security check, there is a rule to protect you making less money than the previous year called the hold harmless provision. The Part B premium increase cannot be larger than the COLA, ensuring that it does not decrease your Social Security benefits. For a thorough explanation, see our article Why Did My Medicare Part B Premiums Change?
The annual COLA keeps Social Security benefits in line with the average cost of living in the United States, since many who receive these benefits rely on them for financial security. Without this set adjustment, Social Security benefits could easily fall behind the day-to-day costs of living. There are two things to keep in mind with these updates, though. First and foremost, a high COLA isn’t always a good thing. The COLA is a reaction to inflation and increased costs in the cost of living. This means that the higher the COLA increase, the more expensive the general costs you’ll experience likely will be.
Secondly, remember that the COLA is an average adjustment across the United States, but inflation isn’t even. If inflation is higher where you live, or if you use more of an item that’s being more inflated (like gasoline or energy costs in this case), the COLA may not fully cover the cost-of-living increase for you. The opposite can be true, too. If that inflation becomes controlled or the increased costs don’t affect you as much, the COLA could represent a greater spending power for you, as Johnson discussed in her interview with CNBC when she was discussing her original historic prediction.
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It’s important to remember that a COLA of 6.2 percent is only a prediction at this point, and it’s likely to change as we gather more information. While we’re now entering the period of time where we can begin to become more assured in the predictions, there are still two-thirds of the data collection period left, and the COLA could shrink or increase. The COLA may not be set in stone yet, but all the signs seem to be saying that we’ll be getting a larger than average (if not historically high) COLA in the next few months.