Economic Update: 401(k) Retirement Plans, Inflation & Social Security

Economic Update: 401(k) Retirement Plans, Inflation & Social Security

Although 2021’s sharp uptick in inflation will not last forever, many of its side effects could. For example, certain goods and services rarely experience prolonged periods of outright deflation and will therefore likely now have a new price floor in place, i.e. pre-COVID levels potentially may never be seen again.

The good news is that the same can be said about incomes because even though 2021’s pace of wage growth should also prove unsustainable, save a marked increase in productivity, most of the absolute pay increases this year will be permanent.

Similarly, Social Security recipients will receive a 5.9 percent cost of living adjustment (COLA) next year due to 2021’s spike in the CPI-W. That will be the largest benefits bump for retired Americans since 1982, and this will be a permanent increase as there are no negative COLAs. This will be welcome news for the nearly 70 million current Social Security recipients, especially given recent inflation dynamics. For example, gasoline costs have been a big driver of headline inflation this year but most retirees spend significantly less time behind the wheel than when they were still working (regularly commuting). At the same time medical cost inflation, which older Americans are typically much more concerned with, has fallen substantially since the start of the pandemic.

For younger Americans, though, we have frequently argued that they should strive to save as much money for retirement as possible so that when they do reach this stage of life they can minimize or even completely eliminate their old-age financial sensitivity to annual COLAs. One of the best ways to do this is to utilize a 401(k) retirement plan, which provides a lot of tax advantages and can often be augmented by an employer’s matching contributions. The government will sometimes make similar inflation-related adjustments to the annual limits on the dollar amount of contributions that can be made to this and other popular tax-advantaged savings vehicles, and inflation was indeed high enough this year to warrant such an increase.

Specifically, current law allows individuals to contribute up to $19,500 each year to a 401(k) plan, plus another $6,500 in “catch-up contributions” for participants ages 50 and older. The IRS recently announced that the main ceiling will be raised to $20,500 in 2022, while the catch-up limit will remain the same. This change will also apply for participants in 403(b) plans, most 457 plans, and the federal government’s Thrift Savings Plan. As for IRAs, inflation was insufficient to lift the annual limit from the current $6,000 cap, and the catch-up contribution for older IRA savers is not subject to an annual COLA, so it too will remain unchanged ($1,000). More details on these and various other alterations that will occur in 2022 can be found in IRS Notice 2021-61.

For some these increases may not seem significant, but an earlier NerdWallet analysis estimated that a 30-year-old who starts investing an additional $500 each year (just $42 a month) could have an extra $70,212 by the time he or she retires. Even for those unable to start until age 40, investing just $500 more every year could still add $34,712 to their retirement nest egg. Most 401(k) participants are already far enough below the annual limit to make these additional contributions, and a growing number of plan sponsors are utilizing automatic escalation and other techniques to nudge workers into more effective savings rates.

What To Watch This Week:


  • Chicago Fed National Activity Index 8:30 AM ET
  • Existing Home Sales 10:00 AM ET
  • 2-Yr Note Auction 11:30 AM ET
  • 5-Yr Note Auction 1:00 PM ET


  • PMI Composite Flash 9:45 AM ET
  • Richmond Fed Manufacturing Index 10:00 AM ET
  • 2-Yr FRN Note Auction 11:30 AM ET
  • 7-Yr Note Auction 1:00 PM ET
  • Money Supply 1:00 PM ET


  • MBA Mortgage Applications 7:00 AM ET
  • Durable Goods Orders 8:30 AM ET
  • GDP 8:30 AM ET
  • International Trade in Goods (Advance) 8:30 AM ET
  • Jobless Claims 8:30 AM ET
  • Retail Inventories (Advance) 8:30 AM ET
  • Wholesale Inventories (Advance) 8:30 AM ET
  • New Home Sales 10:00 AM ET
  • Personal Income and Outlays 10:00 AM ET
  • Consumer Sentiment 10:00 AM ET
  • EIA Petroleum Status Report 10:30 AM ET
  • Survey of Business Uncertainty 11:00 AM ET
  • EIA Natural Gas Report 12:00 PM ET
  • Baker Hughes Rig Count 1:00 PM ET
  • FOMC Minutes 2:00 PM ET


  • Thanksgiving Holiday
  • Markets Closed


  • 2-Yr FRN Note Settlement
  • NYSE Early Close
  • SIFMA Early Close 2:00 ET
  • Fed Balance Sheet 4:30 PM ET

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