The ongoing spike in inflation that has Americans paying more for gas, food, cars and many other things could lead to the biggest Social Security boost in almost 40 years when officials announce the cost of living adjustment, or COLA, for 2022.
Plus, members of Congress have proposed changes to how the COLA is calculated, which could result in even larger Social Security checks for 55 million retirees, their dependents and survivors.
But inflation already has led to tremendous hikes in some living costs for U.S. seniors, who have had to scramble to find ways to save money, according to advocacy group The Senior Citizens League. So, even a major increase may not be enough.
The 2022 COLA could be biggest since 1983
Social Security's 2021 cost of living adjustment, which began affecting payments in January, was 1.3%. This year's inflation has already devoured the increase.
The consumer price index, the primary indicator of inflation in America, shows it hit an annual rate of 5.4% in June — a 13-year high. A New York Federal Reserve survey found consumers expect average inflation of 4.8% for the remainder of 2021.
Based on this year's price hikes, The Senior Citizens League is projecting that Social Security benefits could be boosted by 6.1% for 2022. If that happens, it would be the biggest raise since 1983. The Social Security Administration will announce next year's COLA during the fall.
A generous increase could be bittersweet for some beneficiaries. Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League, says some Social Security recipients could see cuts in other benefits because of their larger checks.
“Higher income could lead to trims in food stamps, rental assistance or Medicare Extra Help, which covers most prescription drug costs,” Johnson tells MoneyWise.
Rethinking the way the COLA is calculated
Advocates have been arguing for years that Social Security COLAs shortchange seniors because they don't accurately reflect the prices older Americans pay. A bill that would alter the way the raises are calculated has been reintroduced in the House of Representatives.
If passed, the Fair COLA for Seniors Act of 2021 would base the annual adjustment on a "consumer price index for the elderly."
It would reflect the costs of items typically purchased by people ages 62 and up, and it could result in higher Social Security payments.
Research by The Senior Citizens League shows that focusing on prices paid by the elderly would have led to a larger COLA every year since 2016. But the differences might not have been significant.
Between 2016 and 2021, increases in overall consumer prices averaged 1.3%. The theoretical price index calculated by The Senior Citizens League would have seen average 1.71% growth over the same period.
Advocates want a sweeter COLA
Johnson says something must be done because Social Security has not kept pace with retiree costs, especially medical expenses and housing, which have tended to rise more quickly than overall inflation.
Retirees also have taken hits to their savings because of the economic turbulence caused by COVID-19. Despite the stock market’s raging comeback from the pandemic’s initial shock, 50% of retirees surveyed by The Senior Citizens League reported that their retirement accounts remained battered by the end of last year.
"Thus a significant number of retired households were hit with soaring cost increases this year at the same time their retirement savings had not recovered from the hit in 2020," she says.
The Senior Citizens League is calling on the Social Security Administration to take three big steps to better meet the increasing financial challenges faced by the elderly:
Provide a one-time modest boost to all retirees, to help improve the buying power of their Social Security benefits.
Tie the annual inflation adjustment to a consumer price index that more accurately reflects the buying patterns of retired and disabled households, which spend a bigger portion of their income on housing and medical expenses. (The Fair COLA For Seniors Act would appear to do this.)
Provide a guaranteed minimum COLA of no less than 3%. "This would be especially important in years when there is deflation and the COLA drops below zero, as it has done three times in the past," Johnson says.
How to fight back against inflation
The Fed thinks rising inflation could be an issue for another “six to nine months”, according to comments Atlanta Fed President Raphael Bostic made to NPR in June.
That could mean an extended period of diminished savings and spending power, but there are several things all Americans — including seniors — can do to mitigate the budget-battering effects of inflation.
If you’re still making payments on your mortgage, it's a good time to refinance and slash your monthly payment. Mortgage rates are once again nearing all-time lows, and the end of a pesky refinance fee has made refi loans an even better deal.
To protect yourself from skyrocketing health care costs, look for a better deal on health insurance. Use a website that allows you to compare plans from hundreds of insurers, to see if there's an option out there that provides the coverage you need but with lower premiums and out-of-pocket costs.
When you shop online, be sure to take advantage of all the bargains available — so you don't overpay. Download a handy browser extension that hunts for lower prices and instantly provides the promo codes websites ask for during checkout.
A few wise investments also can help ward off the effects of rising costs.
Investing in farmland can be a good hedge against inflation, and a new platform is helping investors tap into this long-overlooked asset class.
And if you're skittish about the stock market, you might try a low-stakes way of dipping a toe in. A popular app allows you to invest in a diversified portfolio using little more than "spare change" left over from your everyday purchases.