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Social Security COLA Could Be the Highest in 20 Years – but Is That a Good Reason to Claim Early Benefits?

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This week on the AgingOptions blog, we’re featuring two stories about Social Security – one filled with ominous predictions, and other significantly more optimistic. This article, based on an extensive recent report from the Detroit Free Press, contains the good news. According to the story written by reporter Susan Tompor, the 2022 Social Security COLA – the annual cost-of-living adjustment – could very like see the largest upward boost in 20 years. What’s more, the size of the COLA hike is ironically based on a major price increase for one commodity that seniors tend to use less of: gasoline.

There’s also an important warning included in the Detroit Free Press report. Just because the COLA is expected to be much larger than in recent years, that’s not a good reason for those who have reached age 62 to take early Social Security benefits. Waiting is still the best strategy.

Experts Say the Higher COLA is Not a Good Reason for Early Benefits

“Predictions that Social Security retirement benefits could be heading for a 6.2 percent hike in 2022, thanks to a bump in inflation, could lead some baby boomers to figure they’ve got one less reason to wait to claim benefits,” Tompor writes. “After all, those claiming retirement benefits are going to get more money next year. Why not rush to claim at age 62 or 63 now if you’re going to get extra dough?”

But as she quickly adds, “Experts warn that you might want to rethink that one.

Tompor writes that the “buzz” about a hefty-than-usual COLA is turning Social Security into a hot topic. Last year, before 2021 began, the government announced a whopping 1.3 percent cost-of-living adjustment, which raised the average benefit by a paltry $21 per month. Going back to 1975 when Social Security started automatic annual cost-of-living allowances, last year’s hike was among the smallest on record. But 2022 will be a different story.

What’s Happening in 2022 – and Why?

“Next year,” says Tompor, “we’re talking real money.” If the COLA raise does come out to 6.2 percent, based on an average benefit of $1,655, some retirees could be seeing an extra $100 a month (before taxes, if applicable) added to their Social Security income. The Social Security Administration will make the official announcement of the 2022 COLA in October, after the U.S. Bureau of Labor Statistics releases the September Consumer Price Index. Beneficiaries will start seeing higher payments in January. As of now the Senior Citizens League, a nonpartisan Social Security advocacy group, pegs the projected COLA at 6.2 percent. (Their estimate of 6.2 percent is just that: an estimate, and among the most optimistic ones at that.)

Why such a big boost? It’s based on consumer prices, and this year one commodity in particular has had a disproportionate impact. “Oddly enough,” says the Free Press article, “much of that higher payout can be attributed to a shocking spike in gasoline prices.” As the Senior Citizens League reports, Social Security benefits are adjusted using the Consumer Price Index for Urban Wage Earners and Clerical Workers, “which reflects the spending patterns of younger working adults who drive a lot, not retirees.” Gasoline is a big part of that CPI-W index, and since last year average gasoline prices have risen by as much as 40 percent in some parts of the country.

2022 Could Be a Banner Year for COLA – but Not a Record Year

As the Free Press article observes, any COLA bump in the 6 percent range is pretty unusual, especially considering that inflation, while spiking recently, remains relatively modest. But back in the 1980s when inflation was high and interest rates out of control, there were even bigger COLA increases. 

The largest cost-of-living adjustment ever granted by the Social Security Administration was an eye-popping 14.3 percent in 1980, the year when Ronald Reagan was elected President. By 1981 the COLA rate was still high, at an inflation-driven 11.2 percent, finally dropping to 7.4 percent in 1982. There have been other notable COLA years, such as 1991 (5.4 percent) and 2009 (5.8 percent). But on the opposite end of the COLA spectrum, in 2010, 2011 and 2016, there were no cost-of-living adjustments at all – a big fat zero.

Don’t Let a Big COLA Prompt You to Jump on the Retirement Bandwagon

This good news from the Free Press article comes with a warning. “If you’re thinking about retiring, an estimated 6 percent COLA hike might tempt you to throw in the towel at work and claim Social Security benefits at 62,” Tompor writes. “But here’s why you don’t want to do that.”

Tompor spoke with Social Security expert Mary Beth Franklin, who pointed out something most people don’t realize. “Her take is that anyone who is age 62 or older in 2022 and who is eligible for Social Security will profit from next year’s COLA — even if they have not yet filed for benefits.” As Franklin explains, all future inflation adjustments are effectively “baked into future payments each year” for anyone who will be at least 62 years old in 2022.  

“You’re eligible for cost-of-living benefit increases starting with the year you become age 62,” says Franklin. “This is true even if you don’t get benefits until your full retirement age or even age 70.”  While early payments can start as early as age 62, the monthly payment is far lower than it would be if you wait at least until full retirement age. What’s more, you’re locking in those lower benefit payments for life. Except in certain instances, delaying benefits is usually the recommended strategy: for every year you wait between age 62 and age 70, benefits go up about 8 percent for most retirees.

While the cost-of-living adjustment will provide extra cash for beneficiaries, there’s one bit of cautionary news in the COLA story, the article reports. According to Mary Beth Franklin, 2022 is also expected to bring higher premiums for Medicare Part B, which could erode some of the COLA increases in Social Security.  The new premium will be announced in November.

Social Security Provides Lifelong Inflation Protection

For the Detroit Free Press article, Tompor spoke with Laurence Kotlikoff, professor of economics at Boston University, who worries that rising inflation will continue to plague Americans, especially retirees, in the years ahead. His view is that, by waiting as long as possible to take Social Security benefits, ideally to the maximum age of 70, beneficiaries help make certain that a larger share of their retirement income is inflation-protected.  

“Inflation should make you more prone to being patient when taking Social Security,” Kotlikoff said. Even without concerns over inflation, he’s convinced that waiting to take Social Security closer to age 70 is the “best move by a mile for roughly three quarters of households.” At age 70, the inflation-adjusted benefit is 76 percent higher than at age 62.  

According to Kotlikoff, people can tend to live longer than they expect, and for that reason, waiting is usually the best strategy. By delaying Social Security benefits for as long as possible, retirees protect themselves against both inflation and longevity. “Rushing to make a move just based on the Social Security headlines could end up being the exact wrong thing to do for some in their early 60s,” the Free Press article concludes. 

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