Social Security recipients will get a 5.9 percent boost in benefits next year, representing the highest cost-of-living adjustment in almost four decades, the Social Security Administration announced Wednesday.
The inflation adjustment eclipses last year’s 1.3 percent increase and would be the highest since July 1982, according to the SSA, before benefits began being calculated in December the following year. The pay bump applies to both the roughly 64 million Social Security retiree and disability beneficiaries and 8 million Supplemental Security Income recipients, which include lower-income adults, children and individuals with disabilities.
The cost-of-living adjustment, or COLA, means retirees’ average monthly benefit as of January will be $1,657, or $92 more than their current monthly allotments.
Each year, the SSA adjusts benefits for cost of living based on the change in the Labor Department’s Consumer Price Index for urban wage earners and clerical workers over the previous year, known as the CPI-W.
Inflation has been running hot this year as the economy returned to life after COVID-19 lockdowns, boosted by widespread vaccine availability. Supply chain bottlenecks amid strong consumer demand have contributed, pushing the CPI for all urban workers up by 5.4 percent over the past 12 months, and by 5.9 percent for the CPI-W used to calculate Social Security benefits that represents a smaller subset of the population.
The last time there was a cost-of-living bump similar to the 2022 level, in 2008, it was followed by two years without adjustments as prices normalized. Inflation is not expected to drop as quickly as it did in 2008, but there will likely be smaller than usual cost-of-living increases to benefits over the next two to three years as prices come in lower than expected, SSA Chief Actuary Stephen C. Goss said Wednesday at an event hosted by the Bipartisan Policy Center, a think tank.
Lower increases in benefits in the next couple years and rising wages will likely mitigate any changes to Social Security finances, Goss said.
Social Security is financed by a 6.2 percent tax on wages paid by both workers and their employers, so for self-employed individuals the combined tax is 12.4 percent. The tax is assessed up to annual maximum earnings cap, and the inflation boost means a larger chunk of wages will be subject to Social Security tax in 2022, climbing to $147,000, from $142,800 currently.
Social Security finances are under rising pressure as the retiree population grows. The SSA in August estimated that retiree benefits would have to cut by 24 percent starting in 2033 without legislation to shore up the program, moving up the date of trust fund exhaustion by one year from previous estimate.
On the campaign trail last year, President Joe Biden initially proposed applying the Social Security tax to earnings above $400,000 on top of the existing tax and boosting some benefits. But those proposals haven't gone anywhere on Capitol Hill, and the budget reconciliation process Democrats are using to enact large pieces of Biden's policy agenda can't touch Social Security benefits or taxes under federal budget law.
On Wednesday, Rep. John B. Larson, D-Conn., head of the Ways and Means Subcommittee on Social Security, said he planned to introduce a revised version of his bill from the 116th Congress that would have combined an across-the-board benefit boost, more generous inflation adjustments and higher minimum benefits with higher payroll taxes.
Like Biden, Larson's previous bill would have applied the tax to earnings above $400,000, but it would also gradually raise the tax rate from 6.2 percent to 7.4 percent. A Larson spokeswoman said Wednesday that the new version wouldn't include that rate increase.
In a statement Wednesday, Larson said 5 million seniors are still living below the poverty line and pointed out that a portion of the COLA is eaten up automatically by Medicare premiums. "Congress has failed seniors and that needs to change," he said.
Goss and experts at the BPC event Wednesday also discussed proposals to shore up Social Security finances, as well as those that would adjust benefits to address poverty in older age. Among options include tying cost-of-living increases to a different inflation index that tracks spending by the elderly population, which would likely mean less weighting of energy costs and significant incorporation of medical expenses.
Goss said that index usually rises somewhat faster than other measures. He also noted other forms of retirement income generally aren’t inflation-indexed, leading to more poverty as individuals get older.
Goss called for action sooner to address Social Security’s future shortfall, even if the changes don’t take effect until closer to when funds are set to run dry. Moving sooner would mean “more options, more advance notice and you can phase in the changes more gradually,” he said.
Lindsey McPherson contributed to this report.