What You Need to Know
- Yearly COLAs don't insulate households from inflation's erosive impact, the CRR says.
- Medicare Part B payments typically take a chunk out of Social Security benefits.
- Income levels above which benefits are taxed haven't been raised.
Retired clients collecting Social Security benefits get hit in two ways when it comes to inflation. First, the cost-of-living adjustment, or COLA, typically doesn’t keep up with Medicare payment adjustments, and second, income levels above which retiree benefits are taxed haven’t been raised to match price and income growth.
The combination, a Center for Retirement Research at Boston College paper states, means that inflation continues to eat away at Social Security benefits despite the yearly COLA.
The paper, The Impact of Inflation on Social Security Benefits, by Alicia H. Munnell, director of the CRR, and Patrick Hubbard, a research associate, notes that this year could see the largest COLA in nearly 40 years. And although that’s good, the paper highlights inflation’s erosion factor when it comes to Social Security benefits.
Medicare Premium Decay
As of the July consumer price index, the annual Social Security COLA is estimated to be 6.2%, the highest since 1983. The actual increase for 2022 won’t be released until October, and is based on the third-quarter average of the CPI (July was the first month of the third quarter).
The rub is that Medicare Part B premiums (for physician and outpatient services) are typically deducted from Social Security benefits before the check is sent to the recipient. And though, typically, benefits are increased each year, so too are Medicare Part B premiums.
And the difference is the issue: From 2000 to 2020, the average annual adjustment of the Medicare Part B premium has been 5.9%. But the average annual increase to the Social Security COLA has been 2.2% over the same period.
For example, the paper notes, if the average benefit is $1,900 per month and the Medicare Part B premium is $150, the net for the beneficiary is $1,750 to spend on food, shelter and other expenses.
But if the COLA rises 2.2% while the Medicare Part B premium rises 5.9%, the benefit would rise to $1,941, while Medicare Part B rises to $159, and a net benefit of $1,782 or 1.8% more than the original $1,750, which doesn’t keep up with the average inflation rate.