The large increase in Social Security affects 1 in 5 Americans. This is what it means to you

Currently, an estimated 20% of Americans are on track to see more money entering their households next year. That’s because one in five Americans receives some form of Social Security benefit, either through retirement benefits, spouse benefits, or survivor benefits.

Social Security recipients receive a 5.9% increase in 2022, which is the largest year-on-year increase in benefits in four decades. But for the millions of Americans who will get that bigger payment every month starting next year, will it really make a big difference in improving their financial conditions?

Image source: Getty Images.

Why Social Security recipients will get more money in 2022

The 1 in 5 Americans currently Social Security Benefits will face tighter controls in 2022 as the program is designed to provide cost of living adjustments (COLAs) when a specific consumer price index shows rising prices.

That index, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), tracks how prices change from year to year for a package of goods and services. Of which:

  • Food
  • housing
  • transport
  • Clothing
  • Medical services
  • Recreational Expenses
  • Education and communication services

The CPI-W for the third quarter of the year – July, August and September – is compared to last year’s period. If this shows that prices are rising, the benefits will be increased the following year by a proportional amount.

In most years, but not all, this has resulted in Social Security beneficiaries receiving a raise. The increase in 2022 will be one of the largest in four decades since the CPI-W showed such a substantial year-on-year price increase. The chart below shows how the CPI-W has risen since 1984.

Image source: Social Security Administration.

Here’s Why the COLA Won’t Help Social Security Beneficiaries Much

Monthly Social Security checks will not necessarily increase purchasing power.

If inflation is higher than the consumer price indices of the third quarter of 2021 showed, seniors actually lose ground. With the most recent reports indicating that prices rose 6.2% in October 2021 compared to October 2020, there is a very real chance that even with the large increase, the Social Security increase will not be enough to equalize. keep up with rising prices.

CPI-W is also an imperfect measure of how prices change for seniors because they tend to spend more on goods and services whose prices are rising faster than headline inflation and are undervalued in a price index that reflects urban spending patterns. wage earners and white-collar workers. CPI-W generally underestimates the impact of rising health care and housing prices, both of which make up a large percentage of the budget of typical retirees.

So the Social Security recipients who will get this extra money will have to figure out how to stretch it as far as possible to cover rising prices and maintain their quality of life.

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