Collecting Social Security? This Inflation Threat May Be Good For You

The US is currently experiencing an uptick in inflation with CPI rising 5.3% in August. For many, this is inflation troubling while others see it as transitional. However, Social Security recipients may be getting an unexpected boost from the rising prices. Social Security benefits are indexed to inflation. Historically, Social Security benefits prior to 1972 were increased by special legislation. In 1972, Richard Nixon signed a Bill issuing automatic Cost-Of-Living-Adjustments (COLA) beginning in 1975.

To put this in perspective, have a look at a table that records the automatic increases since 1975:

COLA increases have been wide ranging. In 1980 and 1981, benefits increased by 14.3% and 11.2% respectively. In 2009 and 2010, there were no increases. The Social Security COLA increase is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W currently is about 5.6% higher than the base quarter (267.53/253.412). The Social Security Administration uses the third quarter average CPI-W compared to the average of the previous quarter. In other words, they measure the third quarter of 2021 against the third quarter of 2020.

Thus, since inflation simply has remained relatively high during the third quarter, Social Security recipients could get a 5.6% increase in their benefits. If prices continue to rise in September, the increase may be larger. Of course, if inflation is in fact transitory, and the CPI-W declines, the increase would be smaller.

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The Social Security Administration itself wasn’t expecting this inflationary surge. According to the 2020 Trustees Report, the estimates for 2022, 2023 and 2024 were as follows:

Bottom Line: Watch the inflation numbers for the next month. The Social Security Administration has the automatic increases posted on their website. This inflation may be (hopefully) temporal but may end up being a big benefit to people collecting benefits. As always, I’ll try to answer questions. My e-mail is llabrecque@sequoia-financial.com.

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