Earlier this year, retirees on Social Security saw one of the largest COLA increases they’ve seen in years – since the 1980s to be exact. Unfortunately, the Social Security COLA is expected to be zero for the next few years.
If you’ve been receiving Social Security for a while, you know that your benefits are adjusted each year for inflation. This is known as a cost of living adjustment, or COLA.
The COLA is announced in October of each year and is based on the CPI-W (the Consumer Price Index for Urban Wage Earners and Clerical Workers) from the 3rd quarter of the previous year to the 3rd quarter of the current year. Changes announced in October go into effect in January of the next year.
In 2009, retirees saw their benefits increase by 5.8%, due mainly to the high cost of gas during 2008. This was much higher than normal, with the average increase being around 2.8%. Unfortunately, the Congressional Budget Office (CBO) is estimating that there will be no increase in Social Security benefits for the years 2010 through 2012.
Part of the Social Security law states that no COLAs may be given until the CPI-W is higher than the level at the time of the previous cost of living adjustment. Since the CPI-W has gone down (thanks to lower gas prices), and it is not expected to go back up to the level it was at in 2008 until the year 2011, Social Security recipients may have to wait that long for their next increase.
If you’re already receiving Social Security, you probably are also aware that Medicare Part B premiums have also been rising. Thankfully, there is good news for the majority of retirees who have their premiums deducted from their Social Security checks. There is a “hold harmless” provision that says that Social Security retirement benefits will not decrease as a result of an increase in the Part B premium. So even if Social Security benefits stay the same and Part B premiums increase, your Social Security check will not go down.
However, the “hold harmless” provision does not apply to new Social Security recipients, Medicare participants who are not yet receiving Social Security benefits and high income people. If you are unfortunate enough to fall into any of these groups, you’ll pay higher premiums to make up for the participants who are covered under the “hold harmless” rules. This may seem unfair, but this scenario (where Social Security does not receive a COLA but Medicare premiums are rising) was never expected to happen, because it was never expected that Social Security would not receive a cost of living adjustment since they were made automatic in 1975.
High income earners can blame the Medicare Modernization Act (scheduled to be phased-in completely in 2009) for the increase in Medicare premiums. This act basically says that high income beneficiaries will pay a larger portion of the cost of Medicare, based on their income. While this act is not the focus of this article, the combination of the Medicare Modernization Act with no COLAs for Social Security retirement benefits could mean smaller Social Security checks for people above certain income levels for the next few years.
Bottom line, if you’re collecting Social Security you’re going to learn the true meaning of “fixed income” over the next few years. To prepare you should keep a close eye on your spending, and if you’re a high income earner you should be aware of tax and financial planning strategies that could cause a spike in income and thus a spike in your Medicare costs. These strategies need to be carefully planned and coordinated so that your increase in Medicare costs don’t outweigh the benefits of the planning strategies.