Key Points

  • Seniors on Social Security are entitled to an annual cost-of-living adjustment.
  • Raises have been stingy over the past few years.
  • Next year’s raise could be substantial, but whether it will actually benefit seniors is yet to be determined.

The monthly Social Security benefits that seniors collect are based on a special formula that takes their 35 highest-paid years of wages into account. But those benefits aren’t set in stone.

Each year, Social Security recipients are eligible for a cost-of-living adjustment, or COLA, that has the potential to raise their benefits. COLAs aren’t guaranteed. Rather, they’re dependent on fluctuations in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

If the CPI-W shows an increase in the cost of consumer goods and services, Social Security benefits get a boost. If the CPI-W holds steady or notes a drop in pricing, benefits stay where they are. (Thankfully, they don’t get reduced.)

In recent years, many seniors have bemoaned the fact that their COLAs have been notably stingy. This year, for example, Social Security beneficiaries only got a 1.3% raise.

But 2022’s COLA is shaping up to be far more generous because the cost of common goods and services has risen exponentially in recent months. If that trend continues, it could result in larger payments for seniors.

But while a generous Social Security raise may seem like a good thing, in reality, it may not be.

Seniors on Social Security can’t keep up

Even though seniors on Social Security are entitled to annual raises, they’ve been losing buying power for a good 20 years, as COLAs have fallen short. This year’s COLA could be the most robust raise seniors have seen in years, based on recent inflation data.

But that’s not necessarily the best news.

While seniors may, in fact, be in line for more money, they may also get hurt by rising living expenses. These days, everything seems to be costing more, including essentials like gas and groceries. And so any raise that seniors get may be instantly offset by the higher prices they’re forced to pay at the pump and the supermarket.

Another issue is that we don’t know if Medicare Part B premiums will rise next year, and if they do, to what extent. In previous years, Medicare Part B premiums have come close to wiping out COLAs, so even if next-year’s raise is impressive on paper, seniors may not get to pocket most of it in practice.

The good news is that the current bout of inflation we’re experiencing may end up being transient. Right now, the demand for consumer goods is up as supply chains struggle to meet it. Once supply increases, prices should calm down.

That’s not apt to happen overnight, but it also doesn’t mean we’re in for several years of rampant inflation. Still, seniors who get the bulk of their retirement income from Social Security should plan to spend very judiciously in the near term, reserving their limited funds for essentials like food, medication, and other healthcare expenses.

We won’t get an official 2022 COLA ruling until October, as that number will hinge on CPI-W data from this year’s third quarter. But if recent trends are any indication, it looks like seniors may finally get the large raise they’ve been holding out for. Whether it ends up doing them much good, however, is a different story.

— Maurie Backman

Where to Invest $99 [sponsor]
Motley Fool Stock Advisor's average stock pick is up over 350%*, beating the market by an incredible 4-1 margin. Here’s what you get if you join up with us today: Two new stock recommendations each month. A short list of Best Buys Now. Stocks we feel present the most timely buying opportunity, so you know what to focus on today. There's so much more, including a membership-fee-back guarantee. New members can join today for only $99/year.

Source: The Motley Fool