What’s Behind the Soaring Social Security COLA Estimates for 2022?
The pandemic had some "oddball" effects on the price index on which Social Security COLAs are based, analyst Mary Johnson says.
As inflation rises, the cost-of-living adjustment (COLA) that Social Security recipients can expect rises along with it. The easing COVID-19 pandemic has led to some unusual increases in certain components of the price index on which COLAs are based.
That index, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), rose 5% in May, leading The Senior Citizens League, an advocacy group, to raise its 2022 Social Security COLA estimate to 5.3% from 4.7% a month earlier.
The official COLA, based on third-quarter inflation data, will be announced in mid-October. In 2020, the COLA was 1.3%.
Mary Johnson, the Social Security and Medicare analyst who calculates the League’s estimates, expects more increases in the next few months, especially when looking at some of the major drivers of the CPI-W rise, she tells ThinkAdvisor.
For example, she cites energy, which is heavily weighted in the CPI-W, as one of the key increases year over year, having risen 28.5%, according to the Bureau of Labor Statistics. Gasoline prices rose 56.2%.
Demand for gas is surging as shelter-at-home orders are lifted and travel resumes, she says, though she believes gasoline prices probably will fall toward the end of summer.
Also goosing the CPI-W in May were costs of used cars and trucks (+29.7%), laundry equipment (+26.5%) and car and truck rental prices, which more than doubled.
“These are oddball things due to the pandemic, supply/demand and interruption of supply chains [in the last year],” Johnson notes.
One area in which there wasn’t much of a cost increase was health care, which had been rising steadily, Johnson says. Medical care was up only 1.5%. Physician services rose year-over-year by 4.2% — a typical rise, she says, that will probably increase further as people begin making doctor appointments once again. The cost of home care for older adults was up 9.2%.
Some other notable increases include airline fares, up 24.1% year-over-year; motor vehicle insurance, up 16.9%; and moving, storage and freight expenses, up 16.2% on an increase in fuel costs, Johnson noted.
How is COLA Calculated?
The COLA is outlined through the Social Security Act, and based on increases in the CPI-W, which are calculated on a monthly basis by the BLS.
According to the SSA, “a COLA effective for December of the current year is equal to the percentage increase (if any) in the CPI-W from the average for the third quarter of the current year to the average for the third quarter of the last year in which a COLA became effective. If there is an increase, it must be rounded to the nearest tenth of one percent. If there is no increase, or if the rounded increase is zero, there is no COLA for the year.”