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Rising prices lead to largest Social Security cost-of-living adjustment in four decades

Posted on November 3, 2021

The Social Security Administration announced that its annual cost-of-living adjustment (COLA) will be 5.9 percent beginning in January 2022. That amounts to an average boost in retirement benefits of about $92 per month – the largest COLA benefit adjustment since 1983.

Prior to this adjustment, COLAs have been modest, averaging a 1.65 percent increase annually for the past decade. For comparison, last year’s increase was just 1.3 percent.

This large adjustment is critical for millions of seniors, as Social Security is the largest source of retirement income for most Americans, providing nearly all income (90% or more) for 1 in 4 retirees.

​How are Social Security adjustments calculated?​

According to the Social Security Administration, COLA is based on the change in prices of a market basket of goods. To measure these changes, SSA uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).​

​The 2022 COLA was considerably larger than usual because prices of goods and services have significantly increased in the past year, due in part to extreme weather and COVID-19 outbreaks, both of which have driven up energy prices and strained the world’s supply chains.​

How are COLA increases funded?

  • ​Social Security is funded by a payroll tax of 12.4 percent on eligible wages.
  • Employees pay 6.2 percent and employers pay the other 6.2 percent (with self-employed workers paying the entire 12.4 percent).
  • The money paid in by today’s workers goes to cover current benefits, with any excess going into the Social Security Trust Fund.​
  • Next year, the maximum amount of wage earnings subject to the Social Security tax will increase to $147,000 from $142,800 in 2021.

Will Social Security funds ever run out?

The answer is – the SSA is working on that. Because there are fewer workers relative to the growing number of Social Security beneficiaries, the Social Security system is facing increased stress.

In their 2021 annual report, Social Security’s Trustees estimated that if no legislative action is taken, the trust fund for retired workers and their survivors will run short of money in 2033. Even at that point, over three-quarters of benefits could still be paid out from incoming payroll taxes.

A separate Trust Fund that pays disability benefits is projected to run short of money in 2057.​