Social Security retirement benefits are turning into one hot topic as we’re hearing more buzz about a future hefty cost of living adjustment next year.
The cost of living adjustment, known as COLA, was a mere 1.3% in 2021 — raising the average benefit by about $21 for monthly payments and making it one of the lowest increases on record since 1975 when Social Security started automatic annual cost-of-living allowances.
What’s ahead in 2022?
Next year, we’re talking real money.
Some retirees could be looking at an extra $100 a month, based on an average Social Security retirement monthly payment of $1,655.71 in July.
We won’t know the official cost of living adjustment for 2022 until the Social Security Administration makes that announcement later this month. The percentage is determined after the U.S. Bureau of Labor Statistics releases the September Consumer Price Index.
Any increase due to COLA will show up in checks and direct deposit benefits paid in January.
Right now, it looks like the cost-of-living adjustment is going to be around 6.2%, according to the Senior Citizens League, a nonpartisan group dedicated to protecting and strengthening Social Security benefits.
Why the Social Security hike?
Oddly enough, much of that higher payout can be attributed to a shocking spike in gasoline prices, according to the group.
Under current law, Social Security benefits are adjusted using the Consumer Price Index for Urban Wage Earners and Clerical Workers. The Senior Citizens League notes that the index reflects the spending patterns of younger working adults who drive a lot, not retirees.
As a result, the group said, the index is more heavily weighted for gasoline prices, which went up 41.8% in the past 12 months.
A potential 6% bump is pretty unusual after low inflation. But there have been other years of high COLA increases.
By comparison, other sizable inflation-adjustments for Social Security included: 5.8% for payments in 2009, 5.4% in 1991, 7.4% in 1982 and 11.2% in 1981. The largest increase was 14.3% in 1980, according to Social Security data.
No Social Security cost of living adjustments were made in 2016, 2011, and 2010.
Should you jump on the retirement bandwagon?
If you’re thinking about retiring, an estimated 6% COLA hike might tempt you to throw in the towel at work and claim Social Security benefits at 62. But here’s why you don’t want to do that.
Mary Beth Franklin, a renowned author specializing in unraveling Social Security intricacies, says she has heard some financial planners wonder whether it’s a good time to claim benefits now to lock in that eye-catching cost-of-living adjustment.
And she uncovered something most people don’t know.
Her take is that anyone who is age 62 or older in 2022 and who is eligible for Social Security will profit from next year’s COLA — even if they have not yet filed for benefits.
“I worry that some people may rush to claim Social Security this year to benefit from the exceptionally large cost-of-living adjustment expected next January,” Franklin told me by email.
“I’m sure most people do not realize that they automatically will benefit from next year’s COLA — even if they have not yet filed for Social Security — as long as they are at least 62 or older in 2022,” said Franklin, who wrote “Maximizing Social Security Benefits,” an online book that is available for $29.95 at MaximizingSocialSecurityBenefits.com.
If there are future inflation adjustments, she noted, those who are 62 and older would see inflation adjustments baked into future payments each year until they claim benefits all the way up to when they reach age 70.
She points out that the Social Security Administration notes: “You’re eligible for cost-of-living benefit increases starting with the year you become age 62. This is true even if you don’t get benefits until your full retirement age or even age 70.”
You can begin to receive Social Security benefits as early as age 62, but you’re getting a far lower monthly payout if you claim benefits long before reaching a full retirement age.
Those who turn 62 next year and afterward face another issue, too.
Anyone who was born in 1960 or later has a full retirement age of 67. (If you were born on Jan.1, you’d refer to the previous year.)
Once that full retirement age was 65. But it has been gradually moving higher.
It moved to age 66 for those born in 1943 to 1954. It jumps to 66 and two months for those born in 1955 and after. It gradually climbs upward by two-month increments and it hits 66 years old and 10 months for those born in 1959.
For those turning 62 in 2022 and after, the retirement benefit is reduced by 30% — or $300 on a $1,000 monthly payment — if that group claims at 62 instead of age 67. Each year that you wait past age 62, you get a higher payout.
The Social Security Administration said it adds cost-of-living increases to your benefit beginning with the year you reach 62. And benefits then could be adjusted each year to reflect any increase in the cost-of-living as measured by the Consumer Price Index.
It’s great news for some end-of-the-line baby boomers who have not yet retired or claimed Social Security retirement benefits.
The cost-of-living adjustment will, of course, provide extra cash for retirees and seniors who are already collecting Social Security retirement benefits.
But Franklin also warns that retirees age 65 and older need to watch out for premium hikes for Medicare Part B, which are expected to rise in 2022 and could erode some of the COLA increases in Social Security.
Part B covers outpatient and diagnostic services. Its monthly premium, which is deducted from Social Security benefits, changes on a yearly basis. Franklin said the amount of the premium increase would be known in November.
Ways to look at Social Security
People can apply up to four months before they want their Social Security retirement benefits to start. When they’re ready to apply for retirement benefits, they can use the online retirement application at SSA.gov.
In Michigan, there were nearly 1.54 million people receiving Social Security retirement benefits as of December 2020, the most recent information available.
Michigan’s state population as of April 1, 2020, was at 10,077,331 people.
So nearly 15% of the population receives Social Security retirement benefits.
Laurence Kotlikoff, professor of economics at Boston University, said he’s quite concerned that inflation will continue to be higher in the years ahead.
If inflation continues, he said, many people are better off waiting to take Social Security past age 62 so that they ensure a larger share of their old age income is inflation-protected.
“Inflation should make you more prone to being patient when taking Social Security,” said Kotlikoff, who is president of Economic Security Planning, which offers an online tool called “Maximize My Social Security” for $40 a year for individuals.
Kotlikoff said even without the concerns of inflation, waiting to take Social Security closer to age 70 is the “best move by a mile for roughly three quarters of households.”
He said the the inflation-adjusted benefit at 70 is 76% higher than at age 62.
If prices are going up, he said, waiting to take Social Security closer to full retirement age offers a roughly 7.6% hedge for each year you wait.
Kotlikoff, co-author of “Get What’s Yours — the Secrets to Maxing Out Your Social Security Benefits,” notes that people can tend to live longer than they’d expect and delaying claiming Social Security benefits for as long as possible can be both a hedge against inflation and longevity.
Rushing to make a move just based on the Social Security headlines could end up being the exact wrong thing to do for some in their early 60s.
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