Rising inflation has been one of the top economic stories lately with the annual inflation rate exceeding 5% for the past five months straight. But there’s actually a silver lining to high inflation if you receive Social Security retirement benefits.
Each year, Social Security benefits are adjusted to reflect changes in the Consumer Price Index (CPI) — these are referred to as cost-of-living adjustments, or COLAs. The Social Security Administration recently announced that the 2022 COLA will be a whopping 5.9%.
This represents one of the largest Social Security benefit increases in history and the largest increase since 1981. For comparison, COLAs have averaged about 1.5% in recent years, or four times less than the upcoming 2022 increase.
Rising Inflation Offsets COLA
But don’t start making plans for how you’re going to spend all that extra money just yet. In October, the CPI rose by 6.2%. So the 5.9% COLA isn’t even enough to cover the overall rise in consumer prices if inflation stays at this level throughout next year.
With the 5.9% COLA, the estimated average monthly Social Security benefit next year will rise by about $100 — from $1,565 to $1,657 per recipient. This will result in about $1,200 in additional income per recipient for the year.
The estimated average monthly Social Security benefit for retired couples both receiving benefits next year will rise to $2,753, while the estimated monthly benefit for disabled workers will rise to $1,358. Meanwhile, widows and widowers will receive an average estimated monthly benefit of $1,553 while a widowed mother with two children will receive a monthly benefit of $3,187.
Medicare Premiums Rising, Too
It’s important to note that the Medicare Part B premium will increase by 14.5% next year. This higher-than-expected rise — which is due largely to an expensive new Alzheimer’s drug that will be covered — will effectively lower the amount of the COLA for many seniors.
For a retiree receiving a monthly Social Security benefit of $2,730 in 2021, the 5.9% COLA would increase this by $161. But when you factor in the higher Medicare premium, the net increase would be $139, lowering the effective COLA to 5.1%.
The lower the benefit amount, the more impact the higher Medicare premium will have. For a retiree receiving a monthly Social Security benefit of $1,442 in 2021, the 5.9% COLA would increase this by $85. But when you factor in the higher Medicare premium, the net increase would be $63, lowering the effective COLA to 4.4%.
Steps to Take Now
Keep in mind that the 5.9% Social Security COLA will increase your gross income next year, which could subject more of your Social Security benefits to taxation. This would increase your 2022 tax bill, which would come due when you file your tax return in 2023.
Given this, it might be smart to make some tax-planning moves. For example, you could have more money withheld from your monthly Social Security benefits next year to cover taxes, or have extra money withheld from retirement account distributions to pay any additional taxes that come due.