Why Inflation’s 6% Cost-of-Living Increase to Social Security Could Be a Double-Edged Sword

mphillips007 / Getty Images/iStockphoto
mphillips007 / Getty Images/iStockphoto

Social Security benefits are getting a boost for 2022, potentially the biggest bump in the last 40 years. While the annual increase could be as high as 6.2% due to inflation, that monthly check may not go as far as you think.

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Social Security’s cost-of-living adjustment (COLA), which is calculated each year by using the Consumer Price Index for Urban Wage Earners and Clerical Workers, will make the calculation for 2022 based on data through the third quarter, according to CNBC. AARP also noted that the Social Security Administration typically announces the amount of the annual adjustment in October. The increase in benefits typically goes into effect in January.

While a 6% increase may seem substantial, it doesn’t necessarily mean a bigger income. “Everything is 6% more expensive these days and is only the minimum needed to maintain the purchasing power that you’ve had all along,” Patrick Hubbard, research associate at the Center for Retirement Research at Boston College, told CNBC.

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Two other factors that are likely to reduce the value of that increase are Medicare Part B premiums and taxes, according to research from the Center for Retirement Research. These factors also increase every year and Part B premium payments are usually deducted from Social Security beneficiaries’ monthly checks. The amount someone pays for Medicare Part B depends on their income. In 2021, the monthly premium is $148.50 for single individuals with up to $88,000 in income and married couples with up to $176,000. CNBC also mentioned that from 2000 to 2020, Social Security benefits had an average annual increase of 2.2%, while Medicare Part B premiums went up by 5.9%.

“There is this increase in the benefit, but because it’s eroded by Medicare premiums, it’s not nearly fast enough to keep up with what inflation would be,” Hubbard clarified to CNBC.

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Rising prices in 2021 are another factor contributing to higher COLA estimates. The Labor Department reported earlier this month that July consumer prices were up 5.4% year-over-year. “Higher prices reflect the disarray caused by the pandemic,” said Mark Zandi, chief economist at Moody’s Analytics, according to AARP. He went on to explain that it’s expected that the inflation rate will decline to about 2% in 2022 as supply and demand even out, making the potential 6.2% increase to COLA the exception and not the rule.

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Last updated: August 25, 2021

This article originally appeared on GOBankingRates.com: Why Inflation’s 6% Cost-of-Living Increase to Social Security Could Be a Double-Edged Sword