With more lower and middle income retirees relying on Social Security benefits to help bridge the gap between their savings and their needs, financial planning can help you know what to expect from Social Security and Medicare and avoid surprises. Whether you are currently retired or just looking forward to eventually retiring, it is always a good idea to consult with a financial advisor about what you can do to better manage your plan for the future.
Social Security Benefits Increase Along With Medicare Costs
About 55 million seniors receiving Social Security benefits and 8 million recipients of Supplemental Security Income will enjoy a 3.6 percent cost-of-living adjustment increase beginning with their January 2012 monthly checks. This is the first COLA increase since January 2009.
With declining consumer prices in the aftermath of The Great Recession, there were no increases in 2010 or 2011. Before then, COLA had increased each year from 1975 through 2009. Legislation was enacted in 1973 tying increases to the Consumer Price Index for Urban Wage Earners and Clerical Workers, as calculated by the Bureau of Labor Statistics.
Keeping Up With Inflation?
The law is designed to make sure Social Security benefits do not fall behind the inflation rate by comparing the average third-quarter CPI-W for the current year with the average CPI-W for the last year that the COLA was increased. If inflation increases, so does the COLA.
For the average retiree, next year’s increase will equal about $43 in additional Social Security benefits per month, or $516 per year. But if you are a senior looking forward to a larger check in 2012, do not make plans for that extra money just yet.
Give a Little, Take a Little
While welcome news for seniors, many of who need every dollar of the additional cash, the COLA increase comes with some less-good news. Basic Medicare Part B premiums (which cover doctors visits), withheld from Social Security checks before they are sent to recipients, are projected to rise by about $3.50 in 2012 for most recipients ($7 less than projected as recently as May) and equal to about 8.1 percent of the average COLA increase they’ll be due. Some could see a slightly smaller net increase in Social Security income than they are expecting. More recently enrolled retirees will actually pay less (a $99.90 cost for most, compared to the $115.40 they pay now).
The deductible on Part B will drop $22 to $140; the Part A (hospital) deductible will increase $24 to $1,156 for those who are admitted as inpatients.
In years when there is no COLA increase, Social Security’s hold harmless provision prohibits Medicare Part B premiums from reducing Social Security payments for 75 percent of recipients; however, there is nothing in the law that prevents the premiums from reducing checks by up to the amount of any COLA increase.
When the COLA goes up, that same 75 percent of recipients must pay the extra premium out of their checks. The other 25 percent would actually see a reduction in Part B premiums – this is the same group that pays higher premiums (a large percentage of it covered by state Medicaid funds) to make up the difference in the years without a COLA increase.
Prepare for Changes
Meanwhile, Congress continues to look for ways to save money, such as raising the Social Security retirement age or implementing a change in the formula for figuring the COLA in order to reduce future increases. This could mean even lower adjustments in future years, leaving states and wealthier retirees to take up the slack by paying higher Medicare Part B premiums.
Advocates for retirees argue that the current formula for measuring inflation does not account for the fact that older Americans spend more money on medical care than the general population and that COLA increases are already too small.