Social Security’s Largest Raise in Decades May Not Be a Good Thing

For years, seniors on Social Security have been handed meager raises. Some years, in fact, they’ve gotten no cost-of-living adjustment (COLA) at all.

But 2022 is shaping up to be different. That’s because come next year, seniors may be in line for their most substantial raise in decades. In fact, early estimates are pointing to a 6.2% increase in benefits. But that may not actually be a good thing.

A mixed bag

On the one hand, getting more money in their benefits will be helpful for many seniors. But when we think about why Social Security benefits are going up next year, it’s clear that 2022’s raise is really a mixed bag.

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Social Security COLAs are based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the CPI-W records an increase in the cost of common goods and services, seniors get a boost to their benefits. When there’s no such increase or a decrease, benefits hold steady (they won’t decrease from one year to the next).

The reason next year’s raise isn’t such a great thing is that it probably won’t allow seniors to get ahead financially. Yes, benefits are likely to increase, but so too has the general cost of living risen already.

Right now, seniors are spending more money at the grocery store, paying more at the pump, and generally grappling with the same cost increases working Americans are dealing with. And so while a 6.2% raise might help them keep up, it may not help seniors shore up their finances or boost their savings for extra protection.

Furthermore, we don’t know to what extent the cost of Medicare Part B premiums will rise. Part B premiums are paid directly out of Social Security benefits for those enrolled in both programs. If Part B goes up a lot in 2022, seniors won’t see as much of next year’s raise.

It’s for these reasons that workers are advised to save for retirement on their own and not rely solely on Social Security. The way COLAs are designed makes it so that seniors, for the most part, really can’t come away with more buying power. The best they can hope for is to keep pace with inflation — which, over the past 20 years, hasn’t happened.

Both IRAs and 401(k)s offer tax incentives for worker contributions. And both plans can be invested so that workers have the potential to enter retirement with a nice chunk of savings to supplement their Social Security income. For example, someone who saves $500 a month in a retirement plan over 30 years and sees an average annual return of 7% (which is a bit below the stock market’s average) will end up with around $567,000.

We won’t know what next year’s Social Security COLA looks like officially until October. That’s because we still need additional CPI-W data to calculate that raise. But even if it is as large as analysts expect, it may not do much to better seniors’ financial picture.

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