The price increase in 2022 shows a big problem with the way Social Security calculates the increases | Smart Switch: Personal Finance

(christy bieber)

Inflation news seems to be getting worse every month, with the most recent report for March showing that prices of goods and services rose 8.5% year over year. This is the largest annual price increase since 1981. The big increase was due to rising costs for necessities such as housing, gas, and food.

Unfortunately, this skyrocketing inflation is really bad news for retirees. Rapidly rising prices not only erode the purchasing power of your savings, but also demonstrate a really big problem with how Social Security’s cost-of-living adjustments (COLAs) are calculated.

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There is a major problem with Social Security increases

Social Security COLAs are intended to help ensure retirees don’t lose purchasing power as prices rise.

To measure whether and to what extent prices are rising, the Consumer Price Index for Urban Wage and White Collar Workers (CPI-W) is used. This price index measures the costs of a wide variety of goods and services. The Social Security COLA is set based on changes to the CPI-W. For example, if the CPI-W shows that prices rose 2% year over year, retirees would get a 2% increase.

However, only certain months of CPI-W data are used. Specifically, the COLA is based on average prices for the third quarter of the year before the increase occurs. So the only relevant months in terms of whether retirees get a raise or not are July, August and September. To be clear, this means that the increase seniors got in 2022 was determined based on how much year-over-year prices increased as measured in July, August, and September 2021 compared to the same months in 2020.

The problem is that inflation has skyrocketed since then. As a result, retirees have lost a substantial amount of purchasing power this year. Retirees received a 5.9% benefit increase in 2022. But with prices currently 8.5% higher compared to the same period last year, their benefit increase has fallen short of keeping up. day with rising costs.

The fact that the purchasing power of benefits has eroded so much this year shows the problem that can arise when inflation rises. Since the increase that retirees get is based on older data, a rapid increase in prices can lead to serious financial hardship, especially as the purchasing power of investment savings what’s more falls when costs rise.

What can retirees do?

The COLA formula simply doesn’t respond to rising inflation, and there’s nothing retirees can do about the fact that their Social Security increase may be too small when prices rise rapidly after their benefit increase has been calculated. For the year.

However, seniors can adjust their budgets to ensure they don’t end up in debt or withdrawing too much from their investment accounts when this happens. The sooner older Americans look for ways to cut spending as prices rise, the better chance they have of preserving their long-term financial security.

Future retirees should also be aware that COLAs may not guarantee that retirement benefits won’t decline in value, so they should make sure they have plenty of savings to fund a comfortable life, even if Social Security falls short.

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