“With Cost-of-Living Increases (COLAs,) Social Security and Supplemental Security Income (SSI) benefits keep pace with inflation,” according to socialsecurity.gov. Not so, says Robert Powell, writing for TheStreet, an online financial market newsletter in an Oct. 14 article. Powell says, “The 2022 Social Security raise of 5.9% may be bigger than in recent years, but it’s not enough to keep up with soaring inflation.”
The price of meat, poultry and fish have climbed almost 12 percent since October 2020, according to the government’s Consumer Price Index (CPI.) CBS News says the cost of gasoline is up 40 percent nationally compared to a year ago, and housing costs 18 percent more than a year ago according to the Case-Shiller U.S. National Home Price index. Supply chain bottlenecks and shortages have resulted in a 10.2 percent hike in wholesale food prices, according to Sysco, Inc.
So, why only a 5.9 percent increase in Social Security income?
The type of index matters
COLAs for Social Security benefits are calculated using the Bureau of Labor Statistics (BLS) Consumer Price Index for Urban Wage Earners and Clerical Workers. Some argue that this index does not reflect the inflation experienced by the elderly population. The index is geared toward the spending habits and needs of employed people and heavily weighted on spending habits of those in urban areas.
Is there a better CPI?
The National Committee to Preserve Social Security and Medicare and the Senior Citizens League propose an alternative, the Consumer Price Index for the Elderly (CPI-E.)
Proponents of the CPI-E believe it better represents the costs of those who are retired or disabled. The BLS has had this model since 1987, but it hasn’t been adopted as the COLA index. The CPI-E is based on the same data as the CPI-W, but with statistical adjustments made to reflect different spending habits of retirees, including greater spending on food, rent, medical care and prescription drugs. Social Security recipients have lost 32 percent of their buying power since 2020, with COLAs growing by only half as much as the cost of goods and services purchased by retirees.
Medical costs crippling
“Retirees have been pummeled by the rising cost of health care, and the CPI-W does not accurately reflect how much retirees are spending on healthcare,” Rhian Horgan, CEO of Silvur, a retirement planning app, said.
During the past decade, tens of millions of Social Security beneficiaries’ COLAs were nearly or entirely erased by corresponding increases in Medicare Part B premiums, which are usually deducted from the recipient’s monthly check. Last year’s COLA was 1.3 percent, and the 2021 Medicare Part B premium went up three percent. It wasn’t a tremendous difference, but it chipped away at the modest COLA.
An unpleasant surprise for 2022
When the 2022 COLA was announced in October 2021, the Part B premium was set to rise by $10, according to Mary Johnson, policy analyst for the SCL. That’s not what happened. The standard Medicare Part B premiums announced Nov. 15 are increasing by almost 15 percent in 2022, from $148.50 to $170.10. That’s an increase of $21.60, more than double what was “expected” in October. Deductibles and co-pays are also set to increase. Why the sudden sharp increase in the Part B premium?
Yahoo Finance writer Mike Obel writes that the jump “reflects the sky-high cost of a controversial Alzheimer’s drug.” The drug, Aduhelm, whose real life effectiveness in achieving changes in memory or severity of the disease has not been proven, will cost $56,000 per year. None of the FDA advisory committee members voted to approve the drug, and three resigned in protest when it was approved anyway. Yet Medicare is set for widespread demand of the treatment and raising premiums accordingly.
Eating away at survival
According to the National Institute on Retirement Security 40 percent of older Americans rely only on Social Security income in retirement. That claim is refuted by Andrew Biggs, at the American Enterprise Institute, who stated in an interview with CNBC that only 12 percent of retirees live solely on Social Security. There are differences in how the two organizations conducted their analysis, and both stand by their conclusions. In any event, there are retirees living on only Social Security. Their lives and those who also receive income from pensions and individual retirement savings are all impacted by inflation and look to COLAs to offset some of the impact it causes.
Is Social Security Solvent?
Yes, but there’s a potential glitch. Social Security isn’t like a retirement savings account, with your contributions set aside and earmarked for you individually when you retire, explains AAARP. It’s a pay-as-you-go system. As long as workers and employees pay payroll taxes, the fund will not run out. Incoming revenue largely funds the outgoing benefits. However, because the retired population is increasing faster (and living longer) than the working population it’s estimated that unless changes are made, the fund will be able to pay only 78 percent of scheduled benefits by 2034.
Proposed changes
Congress can delay the problem with Social Security payments. One option is to increase the income level at which earners are required to pay Social Security taxes. Presently only the first $142,800 in income is subject to Social Security tax (although there is no income cap on who receives benefits.) Another proposal before Congress is to raise the minimum Social Security income to $400,000, part of the Social Security 2100: A Sacred Trust Act.
Other possible measures include raising the payroll tax and other controversial measures.