Retirees received some seemingly great news recently from the Social Security Administration (SSA) when they announced that people who collect Social Security benefits would be receiving a 5.9% cost of living adjustment (COLA) next year. This is the biggest raise in forty years, and it means that seniors will, in theory, end up with a lot more money.
The issue is, two pieces of awful news followed, which means that most seniors will not end up better off even with larger checks. In fact, many seniors will end up in a tougher financial situation when it comes to how far their money goes. Here is why.
1. Medicare premiums are increasing 14.5%
The elderly typically depends on Medicare to pay for any healthcare they receive. Most seniors have Medicare premiums taken right from their Social Security benefit checks. The charge for premiums is for Medicare Part B, which is the type of Medicare that pays for routine care and not hospitalizations.
Unfortunately, Medicare premiums will increase sharply next year. The standard month to month premium will increase from $148.50 in 2021 up to $170.10 in 2022. This $21.60 jump is a 14.5% increase, and it will eat up a much of the Social Security increase retirees are getting. The Medicare Part B deductible is also going up by $30 in 2022, increasing from $203 in 2021 to $233 in 2022. This deductible increase will leave retirees responsible for even more costs.
With Medicare premiums taking up around a third of the avg. retiree’s cost of living adjustments, seniors will be left with much less money to help cover the additional costs that COLAs should help defray.
2. Reports are showing 6.2% inflation
Social Security’s COLA was based on an adjustment in the CPI-W (Consumer Price Index for Clerical Workers) and Urban Wage Earners. COLAs can be calculated when you compare the CPI-W for the months of July, Aug., and Sept. to the CPI-W in the same time period the prior year. This comparison has shown 5.9% inflation, which is why retirees are receiving a 5.9% raise.
However, a newer measure of inflation — comparing year-over-year of the Consumer Price Index for All Urban Consumers (CPI-U) in Oct. 2021 — has shown that prices are actually up 6.2% from last year. With just a speedy glance, it is easy to see that a 5.9% increase isn’t going to do a lot to help retirees maintain their purchasing power if the price of services and goods has increased by 6.2% — especially if a lot of that extra money seniors get is taken up by increased Medicare premiums.
Seniors are likely to have financial shortfalls in 2022, despite the large benefits boost, as their checks simply are not going to go far enough to cover the additional medical costs and higher costs for food, transportation and heating expenses. And their issues will likely be made worse by the fact most retirees rely on the money in their savings account to supplement Social Security — and inflation drives down the value of their savings.
Ultimately, seniors may need to lower their expectations in terms of their purchasing power in order to avoid real budget shortfalls — despite receiving the largest Social Security increase in decades. And it is best to prepare for that now rather than not being ready for it in 2022.
Author: Blake Ambrose