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Why the Social Security Increase Isn't as Much as You Think

On October 14, the Social Security Administration announced that the cost-of-living-adjustment (COLA) for Social Security benefits would increase by 5.9% in 2022. This increase is the largest single year increase in benefits that most recipients have ever seen. The last increase to exceed this year’s COLA occurred in 1982, when benefits increased by 7.4%.


The record increase in benefits for 2022 is not an immediate cause for celebration though, as the large increase in benefits does not necessarily mean that retirees will have additional funds to spend freely next year.


Inflation Concerns

Inflation, as discussed in our previous articles, has been on the rise in 2021. As we head into 2022, inflation concerns continue to rise with the global supply chain issues. From 2011-2020, the average annual inflation rate has held steady at 1.75%. Compare that to the Social Security COLA, which has only increased on average by 1.65% over the same time frame. This means that the annual increase in Social Security benefits has not even been able to keep up with inflation, let alone with costs such as healthcare that consistently outpace inflation.


Although 2021 is not finished yet, the current projections estimate inflation will increase 4.8% for the whole year. (1) In effect, this year’s increase in Social Security benefits is not meant to give you more money, but instead it is meant to catch up with the rising costs of goods that you have been purchasing throughout the year.


Rising Cost of Medicare Premiums

As we have previously mentioned, healthcare costs are the fastest growing expense since 1970, averaging a 7.4% annual increase. From the chart below, you can see the COLA that Social Security has received each year since 2010, along with the annual increase in Medicare Premiums. If we go back to 1975—the first year the Social Security Administration issued a COLA—the average annual increase in Social Security benefits is 3.68%. This is not even half of the rate that healthcare costs have grown by over a similar timeframe. When the 2022 Medicare premiums are announced later this year, it would not be surprising to see a similarly large increase in Medicare premiums.

Figure 1 Source: usinflationcalculator.com

Regarding Medicare premiums, it is important to note that there is a Hold Harmless Provision which states that an increase in Medicare premiums cannot reduce the Social Security benefit you received from the prior year. Looking at the chart above, we can see that occurred in 2010 and 2011. Since there were no increases in Social Security benefits in either of those years, those already enrolled in Social Security were able to pay the same Medicare Part B premium of $96.40 as they had in 2009. Unfortunately, those that started claiming benefits in 2010 or 2011 were forced to bear the brunt of the Medicare increases.


Increasing Taxes

Although it is still a proposal in the House Ways and Means Committee, tax legislation is bound to shift in some way over the next 12 months. Although we are waiting on final tax legislation terms, we can be certain that for some individuals, Social Security will be taxed at rates higher than they have been, reducing the net benefits in your pocket.


While Social Security can provide additional income in retirement, the most recent COLA numbers are just another reminder why you should not view Social Security as your primary income source in retirement. Rising costs—especially healthcare costs—are a reminder that the most efficient way to plan for retirement is to take steps to save for retirement on your own, and rely less on Social Security.


This article is a general communication being provided for informational and educational purposes only and is not meant to be taken as tax advice, investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions, inflation or US tax policy. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.


LEGAL, INVESTMENT AND TAX NOTICE. This information is not intended to be and should not be treated as legal, investment, accounting or tax advice.


PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.


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