Here is an early look at the 2022 Cost-of-Living Adjustment (COLA) increase.
Inflation was increasing at 5.3% in August, according to the Consumer Price Index for Urban Wage Earners and Clerical Works (CPI-W). Compiled by the U.S. Bureau of Labor Statistics (BLS), the CPI-W is the basis for COLA adjustments for military, federal and Social Security recipients.
Barring substantial changes, indications are COLA is on track for the largest adjustment since 2009. Soaring inflation, a resurgent economy and other factors may contribute to a sizable COLA increase.
The COLA adjustments are based on inflation as measured in the third quarter (July, August and September) compared to the third quarter from the previous year.
The BLS, a U.S. Department of Labor agency, released its Consumer Price Index (CPI) report including June 2021 in mid-July 2021.
2022 COLA (Cost-of-Living Adjustments) Increase Watch
2021 COLA & CPI Summary
- The August CPI-W (273.567) increased Year over Year by 5.3%.
- The Q2 CPI-W (263.754) increased Year over Year by 5.49%. The 2020 Q3 CPI-W was 253.412.
- Over the last 12 months, the all items index increased 5.3% before seasonal adjustment; this was the second-largest 12-month increase since a 5.4% increase for the period ending August 2008.
- The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3% in August on a seasonally adjusted basis after rising 0.5% in July.
- The June 2021 increase of 0.9% was the largest 1-month change since June 2008 when the index rose 1.0%
- The index for used cars and trucks dropped -1.5%, after recent high gains.
- The food index increased 0.4% in August, a smaller increase than the 0.7% increase reported for July.
- The energy index increased 2.0% in August, with the gasoline index rising 2.8% over the month.
- The index for transportation services, used cars and trucks, and energy services were among the few major component indexes which decreased in August.
- The all items index rose 5.3% for the 12 months ending August; it has been trending up every month since January, when the 12-month change was 1.4%.
- The index for all items less food and energy rose 0.1% in August after increasing 0.3% in July. Many of the same indexes continued to increase.
- The index for all items less food and energy rose 4.0% over the last 12-months, the largest 12-month increase since the period ending November 1991.
- The energy index rose 25% over the last 12-months, and the food index increased 3.7%.
Reasons for a COLA Increase in 2022
- With vaccine distribution underway and restrictions easing, the economic impact may subside by the time the CPI-W measurement period begins in July 2021
- Americans are rushing to engage in activities such as vacations, concerts, attending games, business trips, and indoor dining which in turn is driving up prices
- Some prices that had been depressed have begun to reassert themselves, such as apartment rents, airfares, gas and hotel rates
- Gasoline prices continue to rise
- Many experts are forecasting inflation to move higher
- The Federal Reserve is not expected to raise interest rates in 2021
- Based CPI data through April 2021, The Senior Citizens League (TSCL) is forecasting the 2022 COLA could be 4.7%
- St. Louis Federal Reserve Bank President James Bullard on March 23 predicted a 2.5% increase in 2021 and easing only slightly in 2022
- Federal Reserve Vice Chair Richard Clarida told Bloomberg on April 9 “we expect in our baseline most of that to be transitory and for inflation to return later this year to around 2%”
- The 2020 Old Age, Survivors and Disability Insurance (OASDI) Trustees Report predicts a between a 1.5-2.9% increase
Reasons for a Lower Than Expected COLA Increase in 2022
- April likely also will show a sharp rise, but then the numbers are supposed to decrease as the worst months of the shutdown fall out of the data comparisons.
- Travel, entertainment and dining continue to be depressed, though rising
- Moderate increases in prices are expected to be the monthly norm for a while
- The cost of shelter is currently low due to the pandemic
- Unemployment is expected to remain elevated and could tamp down inflation
- U.S. economic growth will most likely continue slow because of supply shortages, economic uncertainties and the coronavirus pandemic
Could Negative Inflation (Deflation) Affect 2022 COLA?
Deflation, as it applies to COLA, is a decrease in the CPI-W from the previous third quarter to the next. Put another way, deflation is negative inflation.
Fortunately for COLA beneficiaries in 2023, the law protects benefits from decreasing due to deflation. Meaning, the COLA rates remain the same in 2022 if there is deflation.
For example, assume this year’s COLA is -0.5%. If 2023’s COLA calculation is a 1.5% increase, recipients would only see a 1.0% increase (1.5% – 0.5% = 1.0%).
This happened before in 2011. For a COLA to have been triggered for 2011, the CPI-W would have had to not only increase, but increase beyond the highest point it had reached at the end of the 2008 third quarter. Although the CPI-W rebounded in 2010 it was not enough to surpass its 3rd quarter 2008 level, and hence no COLA increase in 2011.
Since 1975, when Social Security benefits were first indexed to the CPI-W, negative inflation has only happened twice. First in 2009 (no 2010 COLA increase) and again in 2015 (no 2016 COLA increase). The 2011 COLA value increased, but not enough to make up for the deflation on the 2010 COLA.
The 2021 COLA increase for the 70 million Americans who rely on Social Security, VA disability compensation, military retirement and other government benefits was 1.3%. While many were hoping for a much higher increase in 2021 this is positive news that there will be any increase given earlier projections of no increase at all. COLA increases are based on the inflation measurement period of the 3rd quarter (July, August, and September) compared to the previous 3rd quarter.
“The 1.3% cost-of-living adjustment (COLA) will begin with benefits payable to more than 64 million Social Security beneficiaries in January 2021.” ~ SSA statement
#BREAKING! Approximately 70 million Americans will get a 1.3% increase in monthly #SocialSecurity benefits and #SSI payments in 2021. Check our blog later this morning for more information: https://t.co/42WeesNNHV #COLA #2021COLA pic.twitter.com/BpK20EC2av
— Social Security (@SocialSecurity) October 13, 2020
2022 Cola Effective & Payment Dates:
- Retired military veterans, U.S. Department of Veterans Affairs (VA) rates for compensation and pension for disabled veterans and surviving families are effective Dec. 1, 2021, and will be reflected on the first check to be paid on Dec. 31, 2021
- Social Security benefits are effective beginning with December 2021 benefits, payable in January 2022
- Federal Supplement Social Security Income and Social Security Disability Insurance (SSDI) payment levels are effective for payments made for January 2022.
2021 COLA (Cost-of-Living Adjustments) Increase Results
Q3 (July-Sept.) 2020 COLA & CPI Summary
- The Q3 (July-September) CPI-W (253.412) increased year over year by 1.28%.
- The September CPI-W (254.004) increased year over year by 1.18%.
- The August CPI-W (253.597) increased year over year by 1.39%.
- The July CPI-W (252.636) increased Year over Year by 0.96%.
- The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 % in August on a seasonally adjusted basis after rising 0.6 % in July’ the monthly increase in the seasonally adjusted all items index was broad-based
- A sharp rise in the used cars and trucks index was the largest factor, but the indexes for gasoline, shelter, recreation and household furnishings and operations also contributed
- The energy index rose 0.9 % in August as the gasoline index rose 2.0 %
- The food index rose 0.1 % in August after falling in July; an increase in the food away from home index more than offset a slight decline in the food at home index
- The food index rose 0.1 % in August after falling in July
- The energy index rose 0.9 % in August, its third consecutive increase
- The index for all items less food and energy increased 0.4 % in August after rising 0.6 % in July
- The all items index increased 1.3 % for the 12 months ending August; this figure has been rising since the period ending May 2020, when the 12-month increase was 0.1 %
- The index for all items less food and energy increased 1.7 % over the last 12 months
Veterans’ Compensation Cost-of-Living Adjustment Act of 2020 (H.R. 6168)
In September 2020, the Senate passed a cost-of-living increase for veterans benefits in 2021, so long as Social Security and COLA increased as well.
The legislation directed the VA to increase, as of Dec. 1, 2020, the rates for VA disability, additional compensation for dependents, the clothing allowance for certain disabled veterans and Dependency and Indemnity Compensation (DIC) for surviving spouses and children.
While Social Security benefits are automatically adjusted annually to keep pace with inflation, Congress must pass legislation annually to provide COLA for veterans and surviving family members receiving those types of compensation from VA.
Note: This does NOT guarantee an increase in 2021 for veterans but rather guarantees veterans will receive an increase if there is also a Cost-of-Living-Adjustment increase.
Why a COLA Increase May Not Help Social Security Recipients
If Medicare climbs at an equivalent or higher rate any increase may be offset by Medicare premiums. Additional senior citizen household spending has typically outpaced COLA because the measurement to determine COLA doesn’t reflect the expenses that impact seniors most, like healthcare (not a heavy COLA calculation) and gas (a heavy COLA calculation).
Will Chained CPI Replace CPI-W?
Chained CPI is a new method for measuring inflation and was recently adopted with the new tax plan. Chained CPI dampens inflation by as much as 0.2% to 0.3% which has many advocacy groups concerned that this method will carry over to COLA. Few people are against a better measurement of inflation, in fact, many advocacy groups believe even the CPI-W is not the best measurement for retirees, however, Chained CPI many contend would be a step backward.
COLA (Cost-of-Living Adjustments) are for the following individuals or areas:
- Retired Military Veterans
- Disabled Veterans – See VA Disability Rate Tables
- Veterans’ Pension Benefits – Veterans Pension Rate Tables
- Survivor Benefit Annuitants – Survivors’ Pension Rate Tables
- Surviving Families of Veterans – Parents’ Dependency and Indemnity Compensation (DIC) Tables
- Social Security recipients
- Federal Civilian Retirees
- Supplemental Security Income (SSI)
- Social Security Disability Insurance (SSDI)
- Eligibility for Medicare Extra Help and Medicaid
- Federal & State food and housing assistance programs
|Quarterly CPI-W for 2020 & 2021|
|Monthly CPI-W for 2020 & 2021|
|Month||2020 CPI-W||2021 CPI-W||YoY Increase/Decrease|
|2021 Official COLA Measurement – CPI-W
|Third quarter total||760.237||TBD|
|Average (rounded to the nearest 0.001)||253.412||TBD|
|Inflation According to the CPI-W||1.3%||TBD|
|Quarterly CPI-W for 2019 & 2020|
|Monthly CPI-W for 2019 & 2020|
|Month||2019 CPI-W||2020 CPI-W||YoY Increase/Decrease|
The table below shows estimated future cost-of-living adjustments (COLAs) as determined by assumptions in the 2020 Trustees Report.
|COLA Estimates by Year
The Board of Trustees regards the intermediate estimates as their best estimates.
The CPI-W takes into account eight major spending categories:
- Food and beverages
- Medical care
- Education and communication
- Other goods and services
How COLA is Determined
The Cost-of-Living-Adjustment (aka Cost-of-Living Allowance) is determined by the Bureau of Labor Statistics’ Consumer Price Index (CPI-W). It is based on the percentage increase of the CPI-W from the 3rd quarter of the previous year versus the current year’s 3rd quarter (July, August, and September).
Veterans who retire during the current calendar year will receive a temporary partial COLA due to already receiving a military pay raise in January.
- The COLA increase is only set at the CPI-W if the increase is less than 2%.
- If inflation is between to 2 to 3% then COLA is set at 2%.
- If the CPI-W is greater than 3% then COLA is set at 1% below the CPI-W.
COLA Versus Federal Pay Increases
Pay increases for current federal workers and COLA for retired workers often differ because they are based on changes in different economic variables.
Federal Pay increases are based on changes in private-sector wages and salaries. Increases in pay for federal civil service workers, therefore, are indexed to increases in the wages and salaries of private-sector employees. The objective of the federal pay policy is to keep pay in the federal government competitive with pay in the private sector.
Cost-of-living adjustments (COLA) ensures that a retiree’s income will purchase the same amount of goods and services after years of retirement that it purchased at the start of retirement.
|History of COLA (cost-of-adjustments) since 1975|
|Money & Finance||COLA Adjustments|
|VA Disability Rates||Social Security|