The Social Security Administration (“SSA”) recently announced that it would increase benefits for retirees and disabled workers by 5.9% in 2022. While this increase in benefits is a welcome change in light of the lingering concerns about inflation, it’s good to know the difference between what this increase means for recipients – and what it doesn’t.
Here, we’ll take a balanced view of the upcoming increase in monthly SSA benefits.
Why this adjustment is important
Discussions within the broader financial community over the past six months have focused almost singularly on the return of inflation. Since last May, year-on-year inflation measures have steadily registered more than 5%, which simply means that the prices of basic goods and services have risen by at least 5% since last year. Conversely, this means that in each of the past five months, your dollars were worth 5% less than a year ago.
Remember that one of the main objectives of prudent savers is to maintain the purchasing power of their dollars; in other words, to maintain the real value for their money. In this pursuit, long-term investors want to achieve a long-term return above inflation, thus maintaining their purchasing power and obtaining a real return on their investment.
For example, stock indices, namely the S&P 500, have averaged around 10% nominal pre-tax return over the past 100 years. If the stock market gains 25% in 2021, but inflation eats away 5% of that return, the actual return for the year would be around 20%.
A real return of 20% is certainly one that most investors would be very happy with. But imagine that the market gained only 3%? You would lock up a negative 2% return for the year after taking into account 5% inflation. Banking on future returns of 20% is a tenuous proposition at best, so it’s always important to realize the very real effect inflation has on your money – and the effect it might have in the future.
The SSA Cost of Living Adjustment (“COLA”) recognizes this reality by planning to increase benefit payments by 5.9% at the start of the new year. This will help protect the elderly and people with disabilities from the otherwise damaging effects of inflation; in other words, COLA will help those living on a fixed income maintain their purchasing power without having to depend on other sources, such as the stock market, for return on their investment.
Why you should temper your expectations
On the one hand, the SSA can be considered as an insurance company: it pays benefits on the basis of an actuarial scale, largely thanks to the income it receives through social security contributions. However, he does not want to increase benefits unless he feels the need to do so. The next bump of 2022 is SSA’s biggest since 1982. it’s been 40 years.
The increase of 5.9% is on the one hand impressive, while on the other hand is what is necessary so that people living on fixed benefits remain able to live at the same level as before. This means that the increase will not necessarily improve the situation of retirees and people with disabilities; it will simply allow them to maintain the same standard of living they enjoyed before.
It’s a little disturbing that is which is necessary to tackle soaring inflation, but at the same time it is encouraging that SSA is willing to take the appropriate steps. The SSA has also faced it with a rapidly depleting pool of trust funds, which means the organization needs to be especially careful about how much money it gives to those who collect its payments.
It also raises questions about the future: Is this inflationary environment transient, as President Biden says, or is this our new normal? Only time will tell. But some interesting signals, such as prolonged supply chain disruptions and continued wage increases, may indicate higher prices are here to stay.
Increase matters, but know what it means
The upcoming increase in social security benefits is good news for recipients; their respective standards of living will not decrease in 2022. But this is not only a cause for celebration: real concerns are at play in the economy at large, as well as on the balance sheet of SSA. It is best to view the COLA as a respite from the unwanted effects of inflation, but it must also be recognized as a necessary tool that the SSA has deployed to operate in a difficult economic environment.