Social Security COLA: A noticeable cost of living adjustment

2022 bump in Social Security payments

Starting in January, seniors will see their Social Security monthly benefits increase by 5.9% due to a cost-of-living adjustment (COLA). The exact dollar amount can already be previewed in recipients’ My Social Security portal.

Applied automatically, COLAs are not new but usually they are not so noticeable. First of all, the average percentage increase has been just 1-2% across the past dozen years or so. The 2022 COLA is large, by comparison. For example, someone receiving $2,000/month in benefits will see an additional $118/month.

Depending on your overall income, up to 85% of your SS benefits may be taxable. Continuing our hypothetical example, if 85% of the person’s SS is taxable, then about $100 of the increase is taxable.

The second reason that we don’t usually notice COLAs is that any increase could be offset by a change in a person’s Medicare Part B premium. For most people, that premium is automatically deducted from the Social Security benefit every month.

That adjustment to Part B premiums (and to Part D for some) is an “income-related monthly adjustment amount,” nicknamed IRMAA. While IRMAA certainly does reflect income, it’s a backward glance to income 2 years ago. So, in 2021, IRMAAs are (generally) based on 2019 tax information. If your income has dropped recently, you can request a reduction in your IRMAA level to lower the monthly premium.

Even though beneficiaries receive notice of changes (tracked in your My Social Security portal), the actual impact of a COLA on monthly benefits may be overlooked. The 2021 COLA is the first in years to be noticeable.

Graphical history of Social Security COLAs

Historical Social Security COLAs

The upcoming 5.9% increase is newsworthy because it’s the biggest COLA in the past 40 years. As the chart shows, the most recent COLAs have been under 4% in most years, with just a few COLAS nearing 6%. But in the 1970s and 1980s, seniors saw COLAs ranging from 6% to 14%. In those years, the label “greedy geezers” emerged but the large COLAs were not about greediness—the COLAs simply reflected societal economics, specifically inflation.

The 2021 bump is because of inflation. Is it predictive?

Inflation is relatively high right now. Some of the common reasons are identified as lower inflation during 2020, we’re catching up in 2021, and supply chain issues worldwide. There is much debate over the future of inflation – are we heading into a repeat of the 1970s with historically high inflation? Or will inflation moderate to a more sustainable level?

Abacus Financial Planning does not try to predict exact inflation rates. We instead focus on building a financial plan that will support goals in a range of possible scenarios.

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