Currently, an estimated 20% of Americans are on track to see more money coming into their households next year. That's because one out of every five Americans receives some type of Social Security payment, either through retirement benefits, spousal benefits, or survivors benefits.
Social Security recipients are slated to get a 5.9% raise in 2022, which is the largest year-over-year benefits increase in four decades. But for the millions of Americans who will get that bigger payment each month starting next year, will it actually make much of a difference in improving their financial circumstances?
Why Social Security recipients will get more money in 2022
The 1 in 5 Americans currently receiving Social Security benefits will get bigger checks in 2022 because the program is designed to provide cost of living adjustments (COLAs) when a specific consumer price index shows rising prices.
That index, called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), keeps track of how prices change year over year on a basket of goods and services. These include:
Education and communication services
The CPI-W for the third quarter of the year — July, August, and September — is compared with the prior-year period. If it shows that prices are rising, benefits are increased by a proportionate amount the next year.
In most years, but not all, this has resulted in Social Security beneficiaries getting a raise. The increase in 2022 will be one of the largest in four decades since the CPI-W showed such a substantial price increase year over year. The chart below shows just how the CPI-W has risen since 1984.
Here's why the COLA won't help Social Security beneficiaries much
Monthly Social Security checks won't necessarily translate to more buying power.
If inflation is higher than the consumer price index data from the third quarter of 2021 showed, seniors will actually lose ground. With the most recent reports indicating that prices were up 6.2% in October 2021 compared with October 2020, there's a very real chance that even with the large raise, the Social Security benefit increase won't be enough to keep pace with rising prices.
CPI-W is also an imperfect measure of how prices change for seniors because they tend to spend more on goods and services that see prices rise faster than overall inflation, and these are undercounted in a pricing index that tracks the spending habits of urban wage earners and clerical workers. CPI-W generally underestimates the impact of rising healthcare and housing prices, both of which make up a large percentage of the budget for typical retirees.
So the Social Security recipients who will get this extra cash have to figure out how to stretch it as far as possible to cover rising prices and maintain their quality of life.
The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.