Rising Prices in 2022 Reveal a Significant Flaw in the Way Social Security Calculates Raises.

0

Inflation news seems to be getting worse by the month, with the most recent report in March indicating that prices for goods and services were up 8.5 percent year on year. This is the most significant annual price increase since 1981. The significant increase was caused by rising costs for necessities such as housing, gas, and food.

Unfortunately, the skyrocketing inflation is bad news for retirees. The rapid rise in prices not only reduces the purchasing power of their savings, but it also highlights a major flaw in how Social Security Cost of Living Adjustments (COLAs) are calculated.

 

Social Security Benefits

 

There is a significant problem with Social Security raises.

Social Security COLAs are intended to help retirees maintain their purchasing power as prices rise.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is used to determine whether and how much prices are rising. This price index tracks the prices of a wide range of goods and services. The COLA for Social Security is determined by changes in the CPI-W. For example, if the CPI-W shows that prices are up 2% year over year, retirees will receive a 2% raise.

However, only certain months of CPI-W data are used. The COLA is calculated using average prices in the third quarter of the year preceding the increase. So the only months that matter in terms of whether or not retirees get a raise are July, August, and September. To be clear, the raise seniors received in 2022 was determined by how much prices increased year over year in July, August, and September of 2021 compared to the same months in 2020.

The issue is that inflation has risen since then. As a result, retirees have lost significant purchasing power this year. In 2022, retirees’ benefits increased by 5.9 percent. However, with prices currently up 8.5 percent year on year, their benefit increases have fallen far short of keeping up with rising costs.

The fact that the purchasing power of benefits has eroded so dramatically this year demonstrates the problem that can arise when inflation soars. Because the raise retirees receive is based on older data, a rapid increase in prices can cause serious financial hardships, especially since the purchasing power of investment savings declines as costs rise.

 

What options do retirees have?

The COLA formula simply isn’t responsive to rising inflation, and retirees have no recourse if their Social Security raise is too small when prices rise rapidly after their benefits increase for the year has been calculated.

When this happens, seniors can adjust their budgets to avoid going into debt or withdrawing too much from their investment accounts. The sooner older Americans look for ways to cut spending as prices rise, the better their chances of preserving long-term financial security.

ALSO READ:

Employed in Retirement? Here’s Why That’s Wonderful… And Why It’s Actually Terrible

Louisiana Taxpayers Have One Week Remaining to File State Income Tax Returns

The IRS Will Soon Pay Billions of Dollars in Interest to Americans Still Awaiting Refunds.

Future retirees should also be aware that COLAs may not guarantee that retirement benefits do not depreciate in value, so they should ensure that they have enough savings to fund a comfortable life even if Social Security falls short.

Leave A Reply

Your email address will not be published.