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Why the social security cost of living adjustment will increase next year

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WASHINGTON (AP) – Rising inflation is expected to result in a significant increase in Social Security’s annual cost-of-living adjustment, or COLA, for 2022. The exact amount will be revealed on Wednesday morning after a report from the Department of Social Security. Work on inflation in September, a data point used in the final calculation.

Over the past 10 years, Social Security’s COLA has averaged around 1.7% per year while inflation has remained low. But the economic recovery from the coronavirus pandemic has triggered a rise in the prices of a wide range of goods and services, and that should translate into bigger checks for retirees.

WHY ARE SOCIAL SECURITY BENEFITS ADJUSTED?

Policymakers say COLA strives to preserve the purchasing power of social security benefits and should not be seen as a pay rise for retirees.

At one point, Congress had to approve increases in inflation, but from the mid-1970s, lawmakers handed that function over to non-partisan experts within the government bureaucracy. The annual review is now linked to changes in an official inflation measure and takes place automatically and without any political policies.

WHAT INCREASE FOR 2022?

Stay tuned.

The Great Recession saw a COLA increase of 5.8% for 2009, and the number for next year could rival that.

This summer, government economics experts predicted a COLA of around 6%. If so, it would be the biggest Social Security hike the vast majority of baby boomer retirees have seen. So far, they’ve collected meager to modest annual adjustments, not counting three years for which there has been no COLA as inflation has barely shown a pulse.

A COLA of 6% would increase the average Social Security payment for a retired worker from nearly $ 93 per month, to $ 1,636 next year. Compare that to this year’s COLA, worth around $ 20 per month.

WHAT CHANGED OVER THE LAST YEAR?

As the economy recovers from the shock of coronavirus shutdowns, prices are rising at a pretty good pace.

The gas serves as a ubiquitous booster, above $ 3 a gallon in most states, $ 4 a gallon in California and Hawaii. But food had already risen, as had labor costs, as employers compete to hire demanding workers in search of higher pay and better benefits. Add to that the supply chain issues that have slowed deliveries of everything from refrigerators to running shoes.

All of this is reflected in the prices that consumers pay for their daily needs.

WHO IS AFFECTED?

The COLA is large enough to have an impact on the overall economy.

It affects the household budgets of about 1 in 5 Americans, including Social Security recipients, disabled veterans, and federal retirees, or roughly 70 million people.

About half of older people live in households where social security benefits represent at least 50% of their income, and a quarter depend on their monthly payment for all or almost all of their income. For the latter group, COLA can literally make a difference in what they are able to put on the table.

DO PRIVATE PENSIONS ALSO OFFER A COLA?

Protection against inflation is central to the design of social security benefits, but it is not so common among traditional private pensions. The benefits paid by most employer plans gradually lose some of their purchasing power over the years.

Social Security not only increases retiree checks to offset inflation, but then adds that amount to a person’s underlying benefit so that it increases with membership as future COLAs are factored in. .

CAN SOCIAL SECURITY ALLOW ITSELF TO CONTINUE PAYING COLA?

Proposals have been launched to increase or reduce COLAs in the context of a wider social security overhaul. Many advocates for the elderly argue that the inflation index currently in use does not adequately reflect the higher healthcare costs faced by the elderly.

On the flip side, groups pushing to cut federal deficits are urging a switch to another measure of inflation that takes into account consumers’ habit of substituting cheaper products when prices rise. This would give slightly lower estimates of the changes in the cost of living.

Social Security administrators said in their report this year that the program’s long-term fiscal imbalance casts a longer shadow.

For the first time in 39 years, the cost of benefits will exceed total Social Security income from deductions and interest on wages. From there, Social Security will have to draw on its savings to pay the full benefits.

The report also moved the date for the exhaustion of the massive Social Security trust fund to 2034 by one year. At this point, the program will only be able to pay 78% of planned benefits, according to the report.

Such a reduction would represent a major hardship for most people who depend on Social Security, even middle-class retirees.

But hardly anyone with political power in Washington talks about fixes.

“Social security is an issue that really needs to be tackled together by both parties,” said David Certner, director of legislative policy at AARP. “It’s very difficult to do bipartisan work on something as big and important as Social Security in a very partisan atmosphere.”

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