How much faster is inflation growing than your Social Security benefit? Your first cost-of-living adjustment (COLA) in January 2022 may have been just barely enough to buy a few extra groceries. But by January your COLA was already falling behind the rate of inflation. The December consumer price index (CPI) data indicates that the CPI-W, which is used to calculate the Social Security COLA, was 7.8% through December 2021. That’s 1.9 percentage point higher than the 5.9% COLA that beneficiaries actually received in January.
In order for the government to have time to make the necessary adjustments to Social Security benefits for the following year, the COLA is calculated on the percentage of increase in the average rate of inflation in the third quarter of the year, —July, August and September, against the third quarter in the previous year. The COLA, however, doesn’t show up in Social Security checks until January of the following year. That leaves three months of price changes that could impact the buying power of your benefits. In most years, that hasn’t mattered too much because prices don’t tend to change very much in just three months. But that was not the case in 2021.
When inflation rises faster than Social Security income, retired and disabled beneficiaries experience a loss in buying power. For example, the average retiree benefit that was $1,564.00 in 2021, increased by 5.9% to $1,656.30 per month in January — an increase of $92.30 per month. But with December inflation of 7.8%, that benefit level theoretically needed to increase by $122.00 to $1,686.00 in order to keep up. Thus the 5.9% COLA leaves average retirees with a shortfall of almost $30 per month, due to inflation through the end of last year.
This is just one example. To learn the amount of shortfall based on your own benefit, multiply your gross Social Security benefit (the amount before deductions) in 2021, by 1.078 to determine the amount of increase based on the December level of inflation. You can find this information in the “Your New Benefit Amount” letter that the Social Security Administration sent out in December. Subtract the gross amount of your actual Social Security benefit for 2022, and the difference is your shortfall.
With inflation continuing to soar, more than 91% of participants in this year’s Senior Survey said that household expenditures over the past 12 months had increased by more than $48 per month, including nearly half of all survey participants who reported that expenditures had increased by more than $144 per month.
How long will inflation continue? Federal Reserve Chairman Jerome Powell is expected to start financial actions to bring down inflation soon. It’s important to understand what that means. While lower inflation could help consumers better afford meals and certain other costs, Inflation may take some time to start turning around, particularly when gas and oil products are likely to remain high. Lower inflation, can temporarily improve buying power, but a COLA that doesn’t adequately keep up with rising costs permanently reduces Social Security income over the course of a retirement.