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How does inflation impact the social security COLA for 2022?

Any increase in social security usually hinges on the current inflation in the US and 2021 is seeing some of the highest annual inflation for years.

How does inflation impact the social security COLA for 2022?
Saul Loeb AFP

In 2019, the Social Security Administration (SSA) paid benefits to as many as 180 million people each month, the majority of whom were senior citizens. Congress ensures that these payments match the rate of inflation, lest people who need it suddenly have their income fall away in times of high inflation. This matching of inflation is called the Cost-of-Living Adjustment (COLA).

In normal economic times it does not change a much, but for 2022, and during other periods in the last 50 years, the COLA has had to increase massively to prevent widespread poverty.

The link between inflation and the projected COLA

How much the COLA for 2022 will be totally relies upon inflation. Using this table from the SSA, we can see that for all the times the COLA has been above 5%, that being 1975-1982, 1990 and 2008, the inflation rate in the US has been just as high.

Graph showing the annual inflation rate of the US economy.

Between 1975 and 1982 the rate fluctuated wildly, but after it was settled until the fall of the USSR in 1990. The fluctuation was the reason why the COLA was introduced. Without it, people's pensions were being left behind by the rapidly inflating dollar.

What this means for 2022

Although we are not yet in 2022, the final announcement of what the COLA will be for 2022 will be in October 2021. This gives those who choosewhat the adjustment will be less than a month to decide what the rate will be.

With large government spending to try and restart the economy due to the pandemic, inflation has risen to very high levels. Therefore, the COLA has to adapt to it. The broad consumer price index rose 5.4% in July compared to a year earlier, driven mostly by rising food and energy prices, according to data released by the Bureau of Labor Statistics.

In 2021, the COLA rose by 1.3%, pretty standard for times of normality in the US economy. For the average retirement benefit, that amounted to $20 more per month for a total of $1,543. However, for 2022 it is projected to be radically different.

The COLA for 2022 is expected to be 6.0%, down from an estimate of 6.1% in August. From January 2022 the new average would be $1,628.