Three Cheers for Inflation? The Social Security COLA

As the economy continues its recovery from the pandemic-induced recession of 2020, one of the consequences is that inflation, which had been rather tame since the onset of the Great Recession in 2008—hovering in or near the Federal Reserve’s “Goldilocks zone” of 2%—has rekindled. The most recent measure of the rate of increase in the cost of basic goods and services, as measured by the Consumer Price Index (CPI), pegs the annual rate of inflation in the US at 7%, the highest measurement since June 1982.

Generally, inflation is seen as bad for companies, as it increases the interest rates they must pay for financing and also indicates a higher cost of labor and basic materials. And there’s no shortage of evidence that this is the case: just notice all the “help wanted” signs the next time you’re out and about. In addition to difficulties finding workers to fill all their shifts, most companies are also dealing with supply-chain snarls that have not only delayed production and led to shortages, but have also driven up the prices of those same hard-to-get materials.

The Fed has repeatedly reiterated its commitment to not allow a return to the runaway inflation of the late 1970s and early 1980s, including its early curtailment of the “easy money” policies intended to maintain liquidity during the pandemic crisis. But still, many observers worry about what they see as a harmful trend for the economy—and the equity markets appear to be endorsing those concerns.

On the other hand, some inflation watchers may be remembering the old proverb, “It’s an ill wind that blows nobody any good.” One group that is actually benefiting, after a fashion, from the rise in inflation is recipients of Social Security. Because Social Security benefits are pegged to the CPI, the Social Security Administration has announced that Social Security benefit checks will be 5.9% larger in 2022 than they were in 2021. This is the biggest increase since 1982, when inflation was still rampant from the “stagflation” economic era. To put that into perspective, Social Security’s cost of living (COLA) increase has averaged 1.65% over the past decade.

The average retiree received $1,565 in monthly Social Security benefits this year, and that will go up $92 per month, to $1,657. The AARP tells us that this will be nearly all the income received by 25% of seniors in America, and many more rely on these checks to pay for a large part of their retirement expenses. But even for those whose reliance on Social Security is less complete, a “raise” of nearly 6% is probably welcome news.

As a fiduciary wealth advisor and financial planner, Bernhardt Wealth Management’s number-one job is helping clients make the best use of all their sources of income as they plan for a financially secure future.  We know that for our clients who are in or approaching retirement, staying abreast of the latest developments in Social Security is important. To learn more on this topic, click here to read our recent article, “Can You Depend on Social Security in Retirement?” And if you have questions or concerns about your retirement strategy, we would be happy to hear from you.

Buen Camino!