A bill has been introduced in the House of Representatives that aims to change how Social Security payments are calculated. Social Security currently adjusts payments annually for cost of living. Experts say that retirees could see a 6.2% hike to benefits in 2022, the biggest increase in decades. But inflation could also undercut this increase. And the Fair COLA for Seniors Act of 2021 wants to mandate Social Security to use the Consumer Price Index for the Elderly (CPI-E) to calculate the true rising costs for seniors and the disabled. Let’s break down how this could affect your Social Security payment.
If you are worried about the future of Social Security and want to make sure you’ll have enough money to live off of in retirement, consider working with a financial advisor to start planning for retirement now.
Cost of Living Adjustment Defined
The cost of living adjustment (COLA) is made to Social Security benefits in an effort to account for inflation and other economic forces that make it more expensive to live in the U.S. In essence, the Social Security COLA raises the amount of money that a person receives in Social Security benefits to keep pace with other price increases. This allows a person’s Social Security benefits to continue covering the same portion of their expenses even as the costs for food, healthcare and other things go up.
How COLA Is Calculated and Proposed Changes
Currently, the COLA is calculated each year based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is a figure that determines the relative cost of goods and services, calculated by the Bureau of Labor Statistics. However, because the CPI-W is designed with wage earners in mind, most people receiving a Social Security benefit are no longer earning a regular wage, and this could not account for the true costs of many retirees.
To address this discrepancy, the U.S House of Representatives recently introduced the Fair COLA for Seniors Act of 2021, which would instead calculate future Social Security COLA adjustments with the Consumer Price Index for Elderly Consumers (CPI–E). This index uses the same formulas and prices as the current CPI-W but weights them for individuals in households age 62 and older.
“The bill would increase benefits and ensure that cost of living adjustments in Social Security reflect the real rising costs for seniors and disabled Americans,” said Congressman John Garamendi (D-CA) in a press release announcing the bill. “From 1982 to 2011, CPI-E rose at an annual average rate of 3.1%, compared with 2.9% for the methods that are currently used.”
Advocates for the bill say that the CPI-W underestimates costs and cost increases around things like healthcare and housing costs, both of which are important to seniors.
For the bill to become law, it will need to pass both the House and Senate before it can get signed by the president. At the moment, the bill is cosponsored by 24 House Democrats and one House Republican. It is expected to face more opposition along party lines in the Senate.
Currently, cost of living adjustments (COLAs) for Social Security benefits are made based on a consumer price index designed for wage earners, which may not be the best benchmark for the cost of living for retirees. The House of Representatives introduced a bill to base adjustments on a consumer price index centered around elderly consumers. The bill needs to get passed in both chambers of Congress before the president can sign it into law.
Retirement Planning Tips
- If you’re worried about Social Security, start saving for retirement by yourself now. A financial advisor can help you make the most of your money so you are set for your later years. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool connects you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.
- No matter what age you are, start thinking about retirement now. Use SmartAsset’s free retirement calculator to see how much money you’ll need to retire, and if you have access to a workplace retirement plan like a 401(k) make sure you take advantage.
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