Key Points
- Social Security checks will look very different this month than they did last year.
- A change is occurring that hasn't happened for four decades.
- While it seems like good news, it's actually a problem for seniors.
In January 2022, Social Security retirees are experiencing something that hasn't happened for four decades. It's a change to their checks that will affect every senior who's receiving income from the popular benefits program.
While at first it may seem like a good thing, the reality is the major milestone Social Security's hitting for the first time in decades actually isn't great for retirees. Here's what's happening to retirement benefits in January 2022.
This big change to benefits is unprecedented in recent times
So what's the big change happening to Social Security benefits this month that hasn't happened for decades? Benefit checks are experiencing an annual increase above 5.8%. Specifically, Social Security benefits will increase by 5.9% in 2022, compared to the amount retirees received in 2021.
A benefits increase above 5.8% has not happened for a very long time. The last time seniors got a larger raise was back in 1982 when the annual cost-of-living adjustment (COLA) was 7.4%.
As the table below shows, the largest bump up in benefits since that time was 5.8%, and that raise occurred in January of 2009. In the recent decade, annual raises for retirees have been much lower, with retirees actually receiving $0 in extra money in three years out of the past 13.
The biggest benefit increase in decades is good news — right?
A more substantial Social Security raise than retirees have seen in decades seems like great news. The only problem is, cost-of-living adjustments that result in benefit increases aren't like typical raises employers may provide based on merit.
Instead, COLAs are determined based on a set formula designed to help retirees maintain buying power. Retirees get a cost-of-living adjustment when a comparison of the costs of goods and services shows prices are increasing year over year. The only reason retirees are getting such a big benefits bump is because data shows inflation is surging. And inflation isn't good for retirees.
When prices rise, seniors' buying power ends up falling because their savings don't stretch as far. Savings is one of two important income sources for older Americans, along with Social Security. If you're retired and withdrawing a set amount from your retirement account, and that money doesn't buy as much as it did in the past, you end up worse off.
You may think the big Social Security raise helps offset the damage inflation does to the value of retirees' savings. After all, they'll get bigger retirement benefit checks. The only problem with that is the best a COLA will do is help a retiree keep pace with cost increases. It shouldn't increase buying power because the COLA calculation matches changes in the consumer price index.
And that's a best-case scenario. If inflation goes up more than the COLA because the consumer price index used to measure rising prices doesn't match senior spending, even a big raise could leave retirees unable to keep up with rising costs. And if inflation surges after the annual COLA is calculated, the raise won't even be big enough for retirees to cope with higher prices.
There's reason to suspect both of these things will happen in 2022. As a result, even after the biggest raise in four decades is applied to Social Security checks, those checks won't stretch as far.
Retirees have valid reason to be concerned that consumer price indexes have revealed that inflation is higher than it's been for decades. While they may be excited to see a big change to their Social Security checks in the form of larger benefits, belt tightening may still be called for, despite the fact they'll get more money.
Why Your IRA Could Crash on February 21st:
In December, NBC News reported that Russia had amassed more than 100,000 troops on its border with Ukraine.
Military experts don't expect Russia to invade until at least February. The ground is too muddy this time of year to move tanks into Ukraine.
But we believe Russia is distracting the world's attention from a much bigger invasion coming in February…
One that could send the market down 50% and destroy the retirements of millions of Americans.
Originally published on Fool.com
