Social Security’s Inadequate Cost-of-Living Adjustment

As time moves forward, the purchasing power of the consumer gets chipped away as the value of the U.S. dollar decreases due to ever-persistent inflation. Inflation can be especially harmful to those who are receiving fixed payments, such as lenders, owners of fixed-income assets, and those who are receiving Social Security benefits1.

While the Social Security Administration (SSA) has an annual cost-of-living adjustment (COLA) in place to reduce the impact of inflation on retirees’ benefits, this is not usually enough to maintain the purchasing power you have had all along. 

To determine the COLA, the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third calendar quarter of the most recent year a COLA was determined, is compared to the average CPI-W for the third calendar quarter of the current year2. The resulting percentage increase, if any, represents the percentage that will be used to increase Social Security benefits beginning in January of 2022. When Social Security announces its cost-of-living adjustment for 2022 later this year, beneficiaries are expected to receive one of the biggest percentage increases in the last 40 years, thanks mostly to inflation. The predicted COLA for 2022 payments is around 6.2% and would result in an increase in monthly payments of nearly $100 a month for those beneficiaries receiving the average monthly payment of $1,555.

While a 6% increase in benefits may sound enticing to retirees, it is important to remember that this 6% increase is not necessarily additional income when considering all applicable factors. One of the main reasons why these cost-of-living adjustments are not keeping up with retirees’ needs is Medicare Part B premiums. Most people enrolled in Medicare have their premiums, which cover doctor visits and other types of outpatient care, deducted from their monthly social security payments3. Year-over-year, Medicare premiums increase and eat into the increase of the cost-of-living adjustment. 

In addition to Medicare premiums, the other major factor that eats into Social Security benefits is tax, as income from Social Security is subject to federal income tax. Individuals with less than $25,000 in combined income, or married couples with less than $32,000, do not have to pay taxes on their benefits. The combined income is calculated by adding adjusted gross income, non-taxable interest income, and one-half of the Social Security benefits of the individual/married couple. Social Security beneficiaries who are above these combined income thresholds may be subject to pay taxes on up to 85% of the benefits4

Although there have been calls to change the way the COLA is calculated, the COLA and Social Security benefits often cannot be relied upon to fund the lifestyle most retirees aim to achieve after retiring. It is important to have a plan outside of this benefit for funding retirement expenses and other financial goals and objectives. 

If you have questions or would like to discuss this topic further, please reach out to a Schneider Downs Wealth Management Advisor. We welcome a conversation with you.

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.

1Inflation erodes the present value of future payments/income that are distributed from fixed investment vehicles by increasing the discount rate at which future cash flows are discounted by.

2Social Security COLA: Cost-of-Living Adjustment; Ajustes del costo de vida (

3BARRONS Article: Social Security Is in Line for Biggest Percentage Bump for Inflation in 40 Years | Barron's (

4CNBC: Social Security cost-of-living increase for 2022 may be largest in decades (


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