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Why is the social security Cost-Of-Living-Projection historically high?

The increase in the COLA for 2021 is projected to be the highest for years, an increase mainly driven by the high inflation of the US economy.

Precio del dólar hoy, 31 de agosto: Tipo de cambio en Honduras, México, Guatemala, Nicaragua...
Jose Luis GonzalezReuters

On Tuesday 21 September, the Senior Citizens League projected that the social security Cost-Of-Living-Adjustment (COLA) for next year will be between 6% and 6.1%. In July the increase was projected to be slightly higher at 6.2%, but the new figure still represents the biggest increase in 40 years.

This is mainly due to the high inflation the US economy is experiencing in 2021. This is due to a few factors, including the large government investment in keeping people and companies afloat, as well as historically low interest rates on loans from banks.

Another factor of social security payments has been developing this week. The US has reached its self-imposed debt ceiling, meaning there could be a government shutdown in October that may affect payments. However, policymakers have tried to reassure recipients that they will still receive the benefits as usual.

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The COLA and inflation

The biggest factor affecting the COLA is inflation. This is because the COLA needs to at least match inflation, or the tens of millions of people receiving the benefit would be losing money in real terms each year. So with inflation at 5.4%, a high COLA is needed to counter its effects.

But with the pandemic and artificially low interest rates, what the COLA will be in 2022 is still very much undecided.

“This year is particularly difficult to forecast with certainty, said Mary Johnson, Social Security policy analyst for The Senior Citizens League. “The inflation patterns caused in large part due to the covid-19 pandemic were unprecedented in my experience. Price changes due to climate disasters throw a monkey wrench into things on top of the difficulty in watching run up in costs earlier this year.”

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. From January, the new average would be $1,628.

Although the change will happen in January, the final announcement of what the COLA will be for 2022 will be in October 2021. This gives those who choose what the adjustment will be less than a month to decide what the rate will be.

Why is inflation so high?

One of the big reasons for the high inflation is the increase in gas prices. The US has been pushing for Gulf states to increase their oil output in an attempt to arrest the cost of gas. This is despite pledges to cut fossil fuel production with the Paris Accords, and oil will surely be a topic of discussion come the COP 26 climate summit in Glasgow in November.

One of the ways to counter high inflation is a raising of interest rates. However, the Federal Reserve has been shy to raise them, as fears of covid-19 have kept the central bank nervous for the US's economic growth.