Inflation and Social Security Benefits - Kris Carroll, Carroll Financial
July 27, 2021

Inflation and Social Security Benefits

Author: Kristopher W. Carroll, CFA®, CFP®

I’ve been talking a lot about inflation lately. Some measures of inflation have certainly been surprising, but maybe none have surprised me more than what I personally see at the grocery store. I continue to believe that inflation data is somewhat distorted by COVID-19 effects. We are keeping an eye on inflation and have been adjusting our strategy in anticipation of dealing with higher inflation over the long term.

Every year since 1975, the Social Security Administration has automatically adjusted its benefit payments upward to account for inflation. The goal is for the payments to keep pace with the cost of living that recipients are experiencing.  For the past decade, these inflation adjustments have been fairly modest as illustrated in the chart below.  During 2009, 2010 and 2015, there were no increases and many of the other raises were 2% or less. 

That could change in the coming year as a result of higher inflation.  The Consumer Price Index increased 5.4% in June from a year earlier, which is the largest gain since 2008.  Extrapolating from the first six months of inflation data, The Senior Citizens League has estimated that the Social Security cost-of-living adjustment for 2022 might be at or around 6.1%. That would be the largest one-year increase since the terrible high inflation days of 1983.

Social Security increases are tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).  Some economists believe that the CPI-W tends to undercount the cost-of-living increases that many people experience.  This is especially true for seniors with budgets more closely tied to housing and health care costs and less to food, apparel, transportation and recreation. 

The Fair COLA for Seniors Act of 2021, a new bill in Congress, proposes to change Social Security’s measure of inflation from CPI-W to CPI-E, which is the Consumer Price Index for the Elderly. The U.S. Bureau of Labor Statistics has been calculating CPI-E since 1985.  This shift, endorsed by the Biden Administration, would have resulted in a 1.4% upward adjustment last year (vs. the 1.3% figure used by the Social Security Administration), a 1.9% increase in 2020 (vs. 1.6%), 2.8% in 2019 (vs. 2.6%), 2.1% in 2018 (vs. 2.0%) and a much bigger increase in 2017 from 0.3% up to 1.5%.  Comparing the two measures of inflation over time, economists estimate that the CPI-E cost adjustments over 25 years would push benefits 5% higher than the existing CPI-W index increase calculation that we use today.

The Social Security Administration has published a lengthy analysis of the differences in the various inflation measures and its analysis suggests that even though healthcare costs are weighted more heavily in the elderly CPI statistics, the prices actually paid by the elderly for health care, medications and hospital costs may be different from the general population calculations of inflation that are embedded in CPI-E.  Also, as the homes owned by the elderly increase in value, their out-of-pocket payments for property taxes and insurance premiums may be more volatile than they are for their younger peers. 

Bottom Line: We are all different and have unique lifestyles. Our individual experience with inflation is just that – individual. We see inflation as both a reality and a risk, but we do not believe we are headed toward uncontrolled inflation.    


E-Newsletter, Retirement Planning
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