Many American seniors often rely on benefit payments from the Social Security program in order to make ends meet in retirement, sometimes to the neglect of other forms of retirement savings earlier in life. While recent indications of a notable rise in the program’s cost of living adjustment (COLA) will likely make a big difference for American retirees, the additional cash in seniors’ pockets from the bump is ultimately being undermined by other rising costs that threaten retirement stability.
This is according to new research presented by the Boston College Center for Retirement Research (CRR), presented in a research brief.
“Since the COLA first affects benefits paid after January 1, Social Security needs to have figures available before the end of the year,” the research says. “As a result, the adjustment for January 1, 2022 will be based on the increase in the [Consumer Price Index] (CPI) for the third quarter of 2021 over the third quarter of 2020. Given the recent rise in inflation, this year’s COLA will likely be the highest in four decades.”
However, one of the major rising costs likely to undermine any additional cash that a senior may get from Social Security is associated with the Medicare program, a medical insurance plan offered exclusively to seniors by the federal government.
“Since 2009, the level of the Medicare premium has been linked to income,” the research says. “For single individuals with incomes of $88,000 or less and married couples with $176,000 or less, the monthly premium in 2021 is $148.50. The premium rises for taxpayers above these thresholds, reaching a maximum of $504.90 per month for those at the highest incomes.”
In the period between 2000 and 220, the average annual adjustment for the Medicare Part B premium — which covers physician and outpatient services — has been 5.9%, dwarfing the annual Social Security COLA of 2.2%, the research says.
Taxes also factor into the equation. Individuals with less than $25,000 and married couples filing jointly with less than $32,000 of joint income do not have their benefits taxed. Anything above that threshold, however, is subject to taxation and further erosion of the potential benefit increase brought about by the estimated increase of the COLA in 2022, the research says.
“[A] personal income tax with unindexed thresholds for benefit taxation means that wage
growth and inflation will subject an increasing portion of Social Security benefits to taxation,” the brief concludes. “Taxation further reduces the net benefit that people will receive. In short, even Social Security does not fully insulate older households from inflation’s erosive impact.”
Read the research brief at the Boston College CRR.