COLA 2022: A Precursor to Higher Rates of COLA in the Future?

Fall 2021 Fiduciary Commentary

After lying dormant for nearly a decade, inflation is back and rising at a faster rate than anytime this century. Pandemic-induced supply chain disruptions, worker shortages, and rising energy costs are creating fear for politicians and savers alike. Overall, CPI climbed 5.4% in the last 12 months ending in Q2 – well above the Federal Reserve’s 2% target and the highest level since 1991.

Necessities of life such as food, housing and gasoline prices have risen significantly, crimping purchasing power. To protect savers from the period of rapid inflation during the 1970s, lawmakers enacted the Cost of Living Adjustment (COLA) provision in 1972 and automatic annual COLAs began in 1975. The COLA determined the benefit payments for social security recipients. Today, COLA also affects individual salary deferral contributions into qualified retirement plans, the taxable wage base and other retirement plan classifications.

The inflationary period of the 1970s continued into the next decade. In 1980, the COLA reached the highest level in history at 14.3%, as the inflation rate spiked to 13.5% that year. During the 1990s, price advances were more muted and COLA increases averaged 2% to 3% per year. The environment of low inflation continued into the early 2000s and beyond. With exceptionally low inflation over recent years COLAs averaged 1.7% in the past decade. In fact, in 2010, 2011, and 2016 experienced no COLA increases at all.

House Ways and Means Social Security Subcommittee introduced Social Security 2100: A Sacred Trust in October to expand benefits and reform Social Security. The bill’s highlights include the following:

  • Increase benefits for current and new beneficiaries – Provides an increase for all beneficiaries that is the equivalent to about 2% of the average benefit.
  • Protection against inflation – Improves the annual cost-of-living adjustment formula to better reflect the costs incurred by seniors helping them spend a greater portion of their income on health care and other necessities.
  • Protects low-income workers –The new minimum benefit will be set at 25% above the poverty line and would be tied to wage levels to ensure that the minimum benefit does not fall behind.

In current form, the legislation proposes to increase Social Security taxes paid by higher-wage earners through a dramatic increasing in the taxable wage base (the amount of income social security taxes is applied) from $142,800 today to $400,000. The proposal to gradually increase the payroll tax rate from workers to employers to 7.4% from the current 6.2% over 20 years, was eliminated.

The Social Security Administration typically announces the amount of the full annual COLA in October with the adjustment in benefits to go into effect at the beginning of the following year. Based on the growth in the Consumer Price Index (CPI-W) from the 3Q 2020 through the Q3 of 2021, Social Security and Supplemental Security Income (SSI) beneficiaries will receive a 5.9 % COLA for 2022.

After years of subdued inflation and low to nonexistent COLA increases, today’s higher prices are calculated to propel 2022’s COLA to the largest increase since 1983 when the adjustment was 7.4%. Today’s inflation, if not just transient, may be a precursor to a higher rate of COLA in the future.

IRS Announces 2022 Cost-of-Living Adjustments 

The IRS recently announced 2022’s retirement-related cost-of-living adjustments.

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