Losing Ground
IT'S BEEN WIDELY reported that the Social Security Administration will likely announce a roughly 6% cost-of-living adjustment (COLA) for 2022. That would be the largest increase in monthly benefits since 1982, when retirees��� checks climbed 7.4%.
But the impact on retirees is more complicated than you might imagine. Boston College���s Center for Retirement Research recently published a paper entitled, ���The Impact of Inflation on Social Security Benefits.��� The paper investigates three ways that inflation interacts with benefits.
First, each year the Social Security Administration computes a COLA increase��for monthly benefits based on changes in the consumer price index for urban wage earners and clerical workers (CPI-W) over the prior year. The increase is announced in October. Thanks to the recent spike in inflation, 2022���s COLA is expected to be around 6%. That should, in theory, ensure that retirees��� benefits rise with inflation. But it doesn���t quite work out that way.
Why not? That brings us to the second interaction. Medicare Part B premiums are deducted from monthly Social Security payments. Part B premiums increase each year based on the federal government���s per-capita Part B spending. The average annual increase in Part B premiums was 5.9% between 2000 and 2020. During the same period, the average Social Security COLA was 2.2%. The upshot: If inflation drives up Part B premiums faster than benefits go up, retirees��� net Social Security checks can rise more slowly than inflation.
Then there���s the third issue: the tax on Social Security benefits. The IRS taxes benefits over certain thresholds. Those thresholds don���t rise with inflation. That means that, as Social Security benefits and other income received by retirees rise along with inflation, a growing number of retirees see their Social Security benefits taxed. The Center for Retirement Research���s paper notes that, among families receiving Social Security, the percentage paying the Social Security tax has climbed from 8% in 1983 to 56% in 2020. The bottom line: Social Security beneficiaries���despite COLA increases���aren���t fully protected against inflation.
But the impact on retirees is more complicated than you might imagine. Boston College���s Center for Retirement Research recently published a paper entitled, ���The Impact of Inflation on Social Security Benefits.��� The paper investigates three ways that inflation interacts with benefits.
First, each year the Social Security Administration computes a COLA increase��for monthly benefits based on changes in the consumer price index for urban wage earners and clerical workers (CPI-W) over the prior year. The increase is announced in October. Thanks to the recent spike in inflation, 2022���s COLA is expected to be around 6%. That should, in theory, ensure that retirees��� benefits rise with inflation. But it doesn���t quite work out that way.
Why not? That brings us to the second interaction. Medicare Part B premiums are deducted from monthly Social Security payments. Part B premiums increase each year based on the federal government���s per-capita Part B spending. The average annual increase in Part B premiums was 5.9% between 2000 and 2020. During the same period, the average Social Security COLA was 2.2%. The upshot: If inflation drives up Part B premiums faster than benefits go up, retirees��� net Social Security checks can rise more slowly than inflation.
Then there���s the third issue: the tax on Social Security benefits. The IRS taxes benefits over certain thresholds. Those thresholds don���t rise with inflation. That means that, as Social Security benefits and other income received by retirees rise along with inflation, a growing number of retirees see their Social Security benefits taxed. The Center for Retirement Research���s paper notes that, among families receiving Social Security, the percentage paying the Social Security tax has climbed from 8% in 1983 to 56% in 2020. The bottom line: Social Security beneficiaries���despite COLA increases���aren���t fully protected against inflation.
The post Losing Ground appeared first on HumbleDollar.
No comments have been added yet.
