A 6% COLA increase may just be the regular American’s main nightmare for the next few years.
A cost-of-living adjustment (COLA) is an increase made to Social Security and Supplemental Security Income to counteract the effects of inflation.
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Cost-of-living adjustments are typically equal to the percentage increase in the consumer price index for urban wage earners and clerical workers (CPI-W) for a specific period.
The COLA for 2022 is 5.9%. So if someone received $10,000 in Social Security benefits in 2021, their benefits for 2022 year would be $10,590.
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COLA is reliant on two components: The CPI-W and the employer-contracted COLA percentage. CPI determines the rate of inflation and is compared yearly.
When consumer prices drop—or if inflation has not been high enough to substantiate a COLA increase—recipients do not receive a COLA. If there is no CPI-W increase, there is no COLA increase
However, with rising prices, the COLA percentage could just amount to nothing. According to research from the Center for Retirement Research, Medicare Part B premiums and taxes highly affect the reduction of the COLA’s value.
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Rising prices in 2021 are another factor contributing to higher COLA estimates. The Labor Department reported earlier this month that July consumer prices were up 5.4% year-over-year.
“Higher prices reflect the disarray caused by the pandemic,” said Mark Zandi, chief economist at Moody’s Analytics, according to AARP.
It’s expected that the inflation rate will decline to about 2% in 2022 as supply and demand even out, making the potential 6.2% increase to COLA the exception and not the rule.
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Inflation levels ranged from 5.7% to 11.3% in the 1970s. In 1975, the COLA increase was 8%, and the inflation rate was 9.1%.
In 1980, the COLA reached the highest level in history at 14.3%, while the inflation rate was 13.5%. During the 1990s, drastically lower inflation rates prompted small COLA increases averaging 2% to 3% per year.
That continued into the early 2000s when even lower inflation rates resulted in no COLA increases at all in 2010, 2011, and 2016.21 The COLA for 2022 is 5.9%, which is up from 1.3% in 2021.
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