Bigger Social Security COLA in 2022 may not increase retiree budgets

The Social Security cost of living adjustment for 2022 will potentially be the largest in 40 years.

Estimates indicate that the annual increase could be 6.2%, driven by rising inflation.

But rising prices on grocery store shelves and at gas pumps aren’t the only reasons those larger monthly benefit checks probably won’t go so far.

The Social Security cost-of-living adjustment is calculated annually using the Consumer Price Index for urban and office workers, also known as the CPI-W. The calculation for 2022 will be based on data from the third quarter.

While people may think that a benefit increase of around 6% is good news, it’s important to remember that it isn’t necessarily additional income, said Patrick Hubbard, associate researcher. at the Center for Retirement Research at Boston College.

“Everything is 6% more expensive these days and is just the minimum necessary to maintain the purchasing power you’ve always had,” Hubbard said.

Plus, two other things – Medicare Part B premiums and taxes – would likely reduce the value of that increase for many, according to a study by the Center for Retirement Research.

While the cost of living adjustment typically increases each year, so do the Medicare Part B premiums that seniors pay for medical and outpatient services. Part B premium payments are often deducted directly from the monthly benefit checks of Social Security recipients.

The exact amount a person pays for Medicare Part B depends on their income. In 2021, the monthly premium is $ 148.50 for singles with income up to $ 88,000 and married couples with up to $ 176,000. But these monthly premiums can reach $ 504.90 per month for high earners.

From 2000 to 2020, Social Security benefits experienced an average annual increase of 2.2%, while Medicare Part B premiums increased 5.9%.

In a single year, the reduction in benefits due to Medicare Part B premiums can be minimal, according to the Center for Retirement Research. But over time, it widens.

For example, in 30 years, the average total benefit could hypothetically increase by 89%, to reach $ 3,600, from $ 1,900, according to calculations by the Center for Retirement Research. But once Medicare Part B premiums are included, net benefits would rise only 60% – to $ 2,800, from $ 1,750.

“There’s this increase in the benefit, but because it’s eroded by health insurance premiums, it’s not fast enough to keep up with what inflation would be,” Hubbard said.

It should be noted that a rule called the disclaimer protects many Social Security recipients from reduced benefits due to higher health insurance premiums.

Social Security income is subject to federal income tax for some beneficiaries.

People with a combined income of less than $ 25,000 – or married couples with less than $ 32,000 – do not have to pay tax on their benefits. Combined income is calculated by adding adjusted gross income, non-taxable interest income and half of social security benefits.

Social Security recipients who exceed these combined income thresholds pay taxes up to 85% of their benefits.

These tax thresholds are not adjusted according to the growth of wages or prices. As a result, more beneficiaries are taxed on their benefits over time, notes the Center for Retirement Research.

In 1983, 8% of eligible families paid tax on their benefits. Today, it is estimated that 56% of beneficiary families pay these levies.

That number is expected to rise to 58% by 2030. But if rising inflation results in higher annual benefit adjustments, more families will pay taxes on their benefits, resulting in lower net benefits.

“Inflation protection is good and necessary, and helps a lot of retirees,” Hubbard said.

“But it’s also a bit of a double-edged sword in that it doesn’t necessarily offer as much protection against inflation or as much additional income as you might think at first glance because of this tax issue. “, did he declare.