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.