Each year’s COLA is determined by comparing the change in the CPI-W from year to year, based on the average of the third-quarter months of July, August and September. The average CPI-W for the third quarter of 2020 was 253.412.
The amount of a COLA is determined by the percent change in the base quarter price index from the previous year to the year in which the COLA is to become effective (the final number is adjusted to nearest 1/10 of 1 percent).
As of May 2021, the trend toward a 2022 COLA is:
(263.612 – 253.412) / 253.412 x 100 = 4.025 (adjusted to the nearest 1/10 of 1 percent = 4.0%)
But wait, if the current inflation trend continues, the COLA could be close to 5%.
Let’s think about this. If inflation is that high. the cost of goods and services has increased as well so the best we can hope for is treading water.
And if the COLAs are higher than the actuary’s project, the Social Security Trust is put under more financial pressure. That’s not good.
As you have just seen, higher inflation can lead to higher interest rates and the stock market does not like rising rates.
If you are not yet retired, it’s time to think about your own plan to deal with inflation as it may affect your lifestyle. That may mean trying to accumulate retirement assets a bit higher than your projected need or perhaps some separate dividend or interest paying investments you can tap as needed for additional income.
And let’s not forget that the increased inflation that the cola is based on is causing all money you saved over a lifetime to be worth less in buying power. So if you are a saver, don’t strike up the band because you’re getting a cola increase
Not that traditional bank savings accounts savings rates would have ever kept up with inflation, under the current FED interbank rates, your bank saving accounts are going to be paying next to zero interest until 2023 unless the FEDs change their minds. This will make the pain that much worse since there is no place to park short term money or withdraws from higher paying investments.
Thus, this is why as you age you must keep a percentage of your money in the markets in order to keep up with inflation.
Let’s not forget that bank loan rates will someday go up to very high rates again. Maybe not tomorrow, maybe not next year, but if you live long enough you will see it happen time and time again. I’ll never forget my 10% mortgage down from 14% and my 18% new car loan (currently I have 0%).
The Fed is already changing its mind… and may raise the fed rate in 2022… or maybe even sooner.
“Fed’s Jim Bullard sees first interest rate hike coming as soon as 2022”