Social Security benefits have become an essential source of income for many American retirees and for people with disabilities.
In fact, the Social Security Administration (SSA) found that among program participants, more than one-third of men and women receive about half of their income from Social Security benefits. For more than 10% of men and women enrolled in the program, social security benefits represent 90% of their income.
Needless to say, Social Security is a cornerstone of many Americans’ financial lives, so those participating in the program should carefully monitor changes and updates. One day that Social Security recipients will want to mark on their calendars is October 13. Here’s why.
Inflation plays a big role in social security
In 1975, Congress implemented the Cost of Living Adjustment (COLA) in Social Security, ensuring that when inflation rose, Social Security benefits would follow. After all, if consumer prices rise at a high rate, people receiving the same amount of social security would see their purchasing power decline.
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As you’ve probably seen, inflation has been at a 40-year high all year. The Consumer Price Index, which tracks the prices of a basket of everyday consumer goods and services, rose 9.1% in June year-over-year. Prices for everything from gas to rent and food have skyrocketed this year.
The SSA calculates the COLA by looking at the growth in the Consumer Price Index for Urban Wage and Clerical Workers (CPI-W) in the third quarter of each year, which includes the months of July through September. The SSA calculates the average of the CPI-W for each of these three months, then compares it to the same period of the previous year. For example, the average monthly CPI-W in the third quarter of 2021 was 268.421. In 2020, the average monthly CPI-W was 253.412. This means that the CPI-W increased by 5.9%, which is how the SSA arrived at its COLA increase for 2021.
The COLA is then applied to a retiree’s Principal Insurance Amount (PIA), which is the amount a person would get if they started collecting Social Security at their normal retirement age. The PIA is calculated using a fairly complex formula.
Although we do not yet know what the CPI-W will be for August and September of this year, the CPI-W in July stood at 292.219, about 9.1% higher than in July 2021. Inflation may have already peaked, but there isn’t enough data to confirm that yet.
The nonpartisan Senior Citizens League predicts that Social Security’s COLA adjustment could reach 9.6% when all is said and done, although earlier reports have suggested the COLA adjustment could reach 10.5% . Either way, it would mark Social Security’s biggest COLA adjustment since 1981.
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Although it may vary by a day or two, the SSA is expected to announce this COLA adjustment on October 13. Even if the adjustment was only 9.1%, it would still be 3.2 percentage points higher than last year’s COLA, which was the largest. COLA adjustment since at least 2009.
The average monthly Social Security program-wide check in July was $1,544.70, which means that a COLA adjustment of 9.6% would increase the average payment by more than $148.
Also, the new Social Security COLA adjustment could end up causing more of your Social Security benefits to be taxed, so there are more implications than just increasing benefits. That’s why Social Security participants will definitely want to tune in on October 13 to learn about the new COLA adjustment right away, so they can prepare accordingly.
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