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Retirement Planning > Social Security

Social Security update: 2012 will see a COLA wash

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For most of the 45 million Americans who receive both Social Security and Medicare benefits, 2012 will be yet another year with effectively no increase in their Social Security payments. Although the government is anticipating a small cost-of-living increase next year, because of increases in Medicare Part B premiums, which are deducted from Social Security payments for those receiving both benefits, an estimated three-fourths of beneficiaries will see their COLAs eaten up by higher premiums.

[See also: 2012 COLA Wash Leaves Seniors Gassed]

On the bright side, thanks to a provision that prevents higher Part B premiums from reducing Social Security payments, most beneficiaries will not have to endure a pay cut. Still, at a time when many seniors have seen their nest eggs vanish in the stock market, their homes plummet in value and their prospects for employment dry up, the effective absence of a COLA is one more bit of bad news.

A recent report by the Congressional Research Service revealed that the upward trend in Medicare premiums means that seniors and the disabled are left with fewer resources for other expenses. Social Security beneficiaries spend an average of 9 percent of their benefits on Part B premiums and an additional 3 percent on Part D. If Medicare inflation continues at the current rate, by 2078, beneficiaries will be spending nearly one-third of their benefits on the two premiums. For Part D beneficiaries, premium increases can result in Social Security pay cuts.

Despite the lack of a COLA for 2012, the third year in a row without an increase, seniors actually benefit from price deflation because their benefits do not follow consumer prices down but remain flat. According to Andrew Biggs, a former deputy commissioner of the Social Security Administration quoted in The Washington Post, the fact that Social Security payments are not cut during a period of deflation means that “somebody else is paying for a greater share of [beneficiaries'] health care. This will get me hate mail, obviously. But it is what it is.”


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