One of the great values of Social Security benefits is that they are supposed to increase each year to keep pace with inflation and protect seniors' buying power. Unfortunately, that's not the way it has worked out in recent years.
The rising cost of living is a major concern for most Americans and news of Social Security's paltry 0.3% cost-of-living adjustment for 2017 — amounting to about $5 per month for the average retiree — won't do much to calm their nerves.
Nearly half of Americans (47%) report being either “very concerned” (36%) or “terrified” (11%) that the rising cost of living will affect their retirement plans, according to a 2016 study from Allianz Life Insurance Co. The Allianz online inflation survey of more than 1,000 adults was conducted in March.
“As consumers move into retirement, they will not only need to consider how to make their income last for 30 years or more, but also how it can cover rising costs driven by inflation,” said Katie Libbe, vice president of consumer insights for Allianz Life.
“The consumer price index that the government uses to determine the annual COLA is simply not doing the job of protecting the buying power of older and disabled Americans,” said Mary Johnson, a policy analyst for The Senior Citizens League, a retirees' advocacy group.
The federal government is looking at the wrong market basket to determine the annual change in prices in the goods and services used by retired and disabled individuals, Ms. Johnson said. Had the government used what many consider to be a more appropriate inflation index that measures costs experienced by people age 62 and older known as the Consumer Price Index for the Elderly or CPI-E, retirees would get a COLA of 2.1% in 2017 instead of the 0.3% that will be applied to retirement and disabilities benefits next year.
The official inflation measure used to calculate cost-of-living adjustments for Social Security benefits, the CPI-W, gives less weight to medical care and housing costs — two categories that have climbed by more than 7% and 5% respectively over the past 12 months — and more weight to gasoline which has plunged deeply over the past year.
Older Americans tend to use more medical services and spend more of their budgets on housing than younger workers. Because the CPI-W excludes the spending patterns of people over the age of 62, it does not include things like rising Medicare premiums, which are one of the fastest growing costs in retirement.
The Senior Citizens League recently sent a letter to every member in the U.S. Senate and House of Representatives calling for enactment of legislation that would provide an emergency COLA; would prevent an anticipated Medicare Part B premium spike of more than 22% in 2017; and urged passage of legislation that would require using the CPI-E for future increases in Social Security benefits. Of course, switching to a more generous inflation gauge would increase the program's future funding gap.
“This year's zero COLA combined with next year's insufficient increase will have a devastating impact on the long-term adequacy of Social Security benefit for millions of Americans,” the letter said.
The Centers for Medicare and Medicaid Services is expected to announce 2017 premiums for Medicare Part B, which covers doctors' visits and outpatient services, in November. Earlier this year, the Medicare Trustees' report estimated that the standard Part B premium could increase by $27.90 to $149 per month in 2017 for about 30% of Medicare beneficiaries.
The majority of Medicare beneficiaries would be protected by a “hold harmless” provision that says their net Social Security benefit cannot decrease from one year to the next just because their Medicare premium increased. That means their Medicare premiums could increase only by a few dollars a month next year.
But the 30% of Medicare beneficiaries who are not protected by the hold harmless provision could see steep premium increases next year. They include new Medicare enrollees in 2017 as well as those who are already enrolled in Medicare but who have not yet begun collecting Social Security benefits.
In addition, higher-income income retirees whose modified adjust gross income exceeded $85,000 for singles and $170,000 for married couples in 2015, the last available tax return, will also pay more for Medicare Part B premiums next year. They will be subject to a monthly high-income surcharge beyond the new standard Part B premium for 2017. They will also incur higher premiums for Medicare Part D prescription drug coverage.
Medicare beneficiaries who want to be protected by the hold harmless provision next year must sign up for Social Security benefits by this November so their Medicare Part B premium can be deducted from their first Social Security benefit that would paid in December. This strategy will only work for people whose MAGI in 2015 was less than the $85,000/$170,000 high-income thresholds.
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a certified financial planner.
