IT’S BEEN WIDELY reported that the Social Security Administration will likely announce a roughly 6% cost-of-living adjustment (COLA) for 2022. That would be the largest increase in monthly benefits since 1982, when retirees’ checks climbed 7.4%.
But the impact on retirees is more complicated than you might imagine. Boston College’s Center for Retirement Research recently published a paper entitled, “The Impact of Inflation on Social Security Benefits.” The paper investigates three ways that inflation interacts with benefits.
First, each year the Social Security Administration computes a COLA increase for monthly benefits based on changes in the consumer price index for urban wage earners and clerical workers (CPI-W) over the prior year. The increase is announced in October. Thanks to the recent spike in inflation, 2022’s COLA is expected to be around 6%. That should, in theory, ensure that retirees’ benefits rise with inflation. But it doesn’t quite work out that way.
Why not? That brings us to the second interaction. Medicare Part B premiums are deducted from monthly Social Security payments. Part B premiums increase each year based on the federal government’s per-capita Part B spending. The average annual increase in Part B premiums was 5.9% between 2000 and 2020. During the same period, the average Social Security COLA was 2.2%. The upshot: If inflation drives up Part B premiums faster than benefits go up, retirees’ net Social Security checks can rise more slowly than inflation.
Then there’s the third issue: the tax on Social Security benefits. The IRS taxes benefits over certain thresholds. Those thresholds don’t rise with inflation. That means that, as Social Security benefits and other income received by retirees rise along with inflation, a growing number of retirees see their Social Security benefits taxed. The Center for Retirement Research’s paper notes that, among families receiving Social Security, the percentage paying the Social Security tax has climbed from 8% in 1983 to 56% in 2020. The bottom line: Social Security beneficiaries—despite COLA increases—aren’t fully protected against inflation.