Last week, the Social Security Administration announced a 5.9% annual cost of living increase in the monthly payments that retirees will receive. This was the biggest COLA boost since 1982 and was triggered by the surge in prices due to the aftereffects of the pandemic. And not just the size, but the timing of the hike may prove fortuitous as well, if longer-term inflation fears ease as the economy stabilizes. No matter what happens next year, you keep the raise.
According to the Social Security Administration, the average monthly retirement benefit payment is around $1,437, so a typical recipient would get an additional $85 per month beginning next January. Unfortunately, Medicare part B premiums are being hiked by $10, but the net $75 monthly raise is still most welcome.
Prior to 1973, beneficiaries of Social Security did not get automatic inflation adjustments but depended on Congress to enact benefit hikes whenever they decided to address the issue. These proved to be sporadic and allowed retiree payments to fall behind the cost of living, sometimes quite badly. President Nixon signed the Social Security Act of 1973 which established a formula for annual adjustments in Social Security and SSI payments based upon the Government's primary inflation gauge, the Consumer Price Index or CPI.
The CPI measures the average prices paid by urban consumers for a broad collection of goods and services like food, gas, housing, medical care, even recreation and funerals. The prices of the items in this so-called "market basket" of goods and services is computed each quarter and compared with the index level of the base years (currently set to 100 for 1982-1984). Any index number greater than 100 signifies price increases since the base years of 82-84. As we all know, the general level of prices rises over time, but the broad trend has experienced fluctuations and even short-term declines during some years. The current CPI index for the third quarter of 2021 is 268.421, meaning that average prices have gone up by roughly 2.7 times since 1984.
Since the monster inflation of the late 70s and early 80s, prices have been constrained to much more moderate increases up through the middle of 2021, meaning that Social Security COLAs have typically been less than 2% over the past 40 years. In 2015, there was no COLA at all since the collapse of oil prices that year actually caused the CPI to fall briefly. If inflation is negative, there is no COLA but the benefits are never reduced even if prices decline. By contrast, the 1980 COLA adjustment was 14.3%, a stark reminder of just how frightening runaway inflation can be.
Social Security payments are actually indexed twice for inflation. A retiree's payment is based upon an average of their 35 highest wage-earning years. These historical wages are adjusted for inflation based upon an index called the National Average Wage Index, so the paychecks you brought home in 1975 are adjusted up to 2021 levels. Then the annual COLA adjustment is applied based on the change in the CPI for the third quarter of each year compared with the CPI of the previous year's third quarter. As of the quarter ending September 30, the CPI increased by 5.9% year over year and will be applied to the first benefit payment of 2022. This continues throughout your lifetime starting at age 62 and is applied even if you have not yet begun receiving benefit payments.
While economists debate the degree to which higher inflation is permanent, the Federal Reserve and many analysts expect price hikes to moderate as the unprecedented supply chain congestions and the unexpected surge in consumer spending post-pandemic begin to moderate over the next few months. If this proves correct and the CPI growth slows, retirees will benefit from the timing of this year's cost of living increase. If not, then like the Vols, there's always next year.
Christopher A. Hopkins is a chartered financial analyst in Chattanooga