2022 COLA Predicted to be Largest in Over a Decade
Each year, the Social Security cost-of-living adjustment (COLA) updates the amount that Social Security beneficiaries receive each month. This is mainly done to keep the benefits in-line with inflation and the standard costs of living in the United States so that seniors and others enrolled in Social Security are still protected by the safety net it provides. The adjustment is typically announced in October each year and goes into effect the following January. The COLA is based on a number of traceable factors, which allows experts and industry professionals to make predictions based on what they’re observing. Recently, there’s been some noise about the upcoming COLA that may interest you.
What is the COLA Prediction?
This month, the signs that often hint at the annual COLA have led some to predict a larger-than-average adjustment. How much larger, you ask? Well, the Senior Citizens League’s (TSCL) Social Security and Medicare policy analyst Mary Johnson believes it could be as high as 4.7 percent. This would be the highest COLA increase in over a decade, since when it was 5.8 percent for 2009. This increase is tied to a sharp jump in inflation.
“When January 2021 data was released, I estimated that the 2022 COLA would be only 1.5 [percent]. The fact that today’s estimate is 4.7 [percent] reflects an increase in inflation over just 90 days.” — Mary Johnson, TSCL Social Security and Medicare policy analyst, to ThinkAdvisor
Johnson also informed CNBC that the inflation is largely due to increased energy and gasoline prices. Since these are only estimates, it’s also possible that the COLA could — and likely will — change before the official number is announced in October. The current estimate is based on a 12-month average inflation projection that utilizes data through April 2021, while the COLA is based on Consumer Price Index data calculated on a monthly basis from the third quarter of the previous year (2020 in this case) to the third quarter of this year (2021). This means there are about six more months of data and potential changes to things like inflation that could greatly change the official COLA. Nothing illustrates this more than Johnson’s own estimate tripling (from 1.5 percent to 4.7 percent) in just 90 days. In her interview with CNBC, Johnson noted that the potential for inflation to drop, but the estimate remaining at 4.7 percent, would be great news for seniors.
A Historical COLA Comparison
We mentioned previously that this would be the largest COLA increase since the one for 2009, but it’s important to put into context how large this increase would be. Comparatively, the COLA for 2021 was 1.3 percent, making a 2022 COLA of 4.7 percent nearly four times larger. This increase becomes even more notable when you compare it to the rest of the COLA’s history. The lifetime average increase of the COLA is 3.6 percent, which is buoyed by the COLAs from 1975 to 1982 — which averaged 8.7 percent. For a more recent comparison, the average annual COLA has sat at 2.1 percent since 2000, making the predicted 2022 COLA more than double the average since the turn of the century.
The predicted 2022 COLA of 4.7 percent would also be tied with 1990 for 11th highest COLA ever, rising to tied 3rd if you remove 1975 to 1982. The way COLA was calculated was changed in 1983, which explains why the previous years 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.
How Does the COLA Affect My Medicare?
The COLA is closely tied to what you may pay for Original Medicare, primarily through the Medicare Part B premium. We discuss it thoroughly in our article Why Did My Medicare Part B Premiums Change?, but let’s give a quick breakdown of what you can expect.
Depending on the COLA, the premiums for Medicare Part B may increase to cover the costs of health care. If you have your Part B premiums taken directly out of your Social Security check, this increase cannot reduce how much you receive from Social Security. This is due to the hold harmless provision, that states the Part B premium increase cannot be larger than the COLA. For more information on the hold harmless provision and how the COLA influences your Medicare coverage, please read the article linked above.
Important Things to Remember
The annual COLA is a great way to try and keep Social Security effective and protective for seniors and eligible citizens, where both groups are on a fixed income that relies on their benefits. That said, there are two things to keep in mind with these numbers. First, a high COLA isn’t always a good thing. Generally, the COLA is a reaction to inflation and increased costs, so the higher the COLA, the higher the costs of living it’s reacting to. Also, the COLA is an average adjustment, so if inflation where you live is higher or 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 increase to the cost-of-living you personally are experiencing. The opposite, of course, could be true, in that inflation comes under control or the increased costs don’t affect you as much and the COLA represents a greater spending power for you, as Johnson discussed in her interview with CNBC.
The second is that the 4.7 percent is only a prediction at this point, and it’s likely to change as we gather more information. Depending on how the rest of the year goes, it could shrink or increase. So, while we can’t be certain of the COLA yet, the signs are pointing to a larger than average correction to reflect the inflation and increasing prices of living in the United States.