Rising Prices Likely to Lead to Higher Social Security COLA
For those who rely heavily on Social Security benefits to pay their bills, the recent uptick in prices in what seems just about everything are cause for concern. Especially so given what many consider to be inadequate cost of living adjustments (COLA) over many years now. The 2021 increase received by Social Security recipients was only 1.3%, for instance.
To give you some idea of how costs have been going up, year over year, from May 2020 to May 2021, the price of gasoline increased a whopping 56.2%, while used car and truck prices rose a significant 29.7%.
Other day to day common needs and their cost increases year over year include apparel at 5.6%, food at 2.2% (which frankly seems low to me), and electricity at 4.2%.
And while it doesn't factor directly into the Social Security COLA formula, it is interesting to note that home prices rose 13.2% in May, a record year-over-year jump, with a typical home selling for $287,148, according to the online site, Zillow.
This uptick through May has led The Senior Citizens League (SCL) to forecast that the 2022 Social Security COLA will be 5.3%. SCL, founded in 1992, bills itself as "one of the nation's largest nonpartisan senior groups", and regularly makes such projections based on the price index information upon which the Social Security COLA are based. This data comes from the Bureau of Labor Statistics.
If this forecast holds true, it would be the biggest jump in the COLA since the 2009 increase of 5.8%.
Previously, based on April data, SCL had projected a COLA of 4.7%. The Kiplinger Letter, another respected source, had projected 4.5% for April, and as of this writing, had not yet released its May estimate.
In case you are curious, the annual Social Security COLA is determined using the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The SCL contends that use of this index is a big problem for seniors. According to the SCL, since the year 2000, Social Security beneficiaries have lost 30% of their buying power. COLA increases during this time were 53%, however, the cost of the goods and services that are typically incurred by seniors have gone up 99.3%, according to the SCL.
To fight this problem, the SCL has called for future COLA increases to be based on a different index, the CPI-E, which is the Consumer Price Index for Americans 62 years of age and older. As the title indicates, this is the cost index reflecting the type of expenses more likely to be incurred by seniors. The league says the current index being used underestimates the inflation that Social Security recipients experience because it does not give enough weight to expenses like health care or housing costs.
Back to the current projection; it's just that, a projection, and there is still four more months of data to come in before the official COLA for next year is determined. How the rest of the year shapes up in terms of the cost of goods and services will have a big effect on the final number, and there is some belief that those costs will level off or may even begin to decline, as supply chain issues are resolved and the economy begins a (hopefully) post-pandemic stabilization.
Action by the Federal Reserve regarding interest rates could have an impact here as well. On June 16, the Fed held its key interest rate near zero, but is now forecasting two rate hikes in 2023, citing an upgraded economic outlook and concerns about inflation. It previously had signaled no rate increase until 2024.
Stock markets, as would be expected, reacted negatively to this news. Fed Chairman Jerome Powell, however, cautioned against reading too much into the projections, saying they needed to be taken with a "big grain of salt". In other words, there's a lot that can still happen.