How record Social Security cost-of-living adjustment will be impacted by high inflation, Medicare premiums

Personal finance

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News that inflation rose to a historic high in November probably comes as no surprise to retirees.

But they may be in for another shock when they receive their monthly Social Security checks in January.

The Social Security Administration announced in October that beneficiaries will get a 5.9% boost to their checks in 2022 — the biggest annual cost-of-living adjustment in four decades.

Yet since then, another key measurement for inflation — the Consumer Price Index — has also reached historic highs.

In November, that measurement for a basket of consumer goods and services climbed to a 6.8% year-over-year increase — the highest since 1982.

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“At first it was more, ‘Wow, look at how great this is,'” said Kelly LaVigne, vice president of consumer insights at Allianz Life Insurance Company of North America, of reactions to the Social Security COLA for 2022.

“Now it’s a recognition after they see this latest CPI news, ‘Oh, that’s why they did it,'” LaVigne said.

For retirees who have been living on a fixed income for a long period of time, higher prices can cut into their ability to pay for rent, food and prescriptions.

“They haven’t even received this larger check yet,” LaVigne said. “So they’re experiencing these higher prices without even getting more money, which will start in January.”

More than 64 million Social Security beneficiaries are due for increases to their monthly checks.

The estimated average monthly benefit for all retired workers will rise to $1,657, up from $1,565 — a $92 increase.

Just how much more money will appear in monthly checks could also be affected by another item — rising Medicare Part B premiums.

The standard Part B premium for 2022 will be $170.10, a 14.5% increase from $148.50 this year.

Part B premium payments are often deducted directly from beneficiaries’ monthly checks.

Exactly how much people will pay varies on their tax-filing status — married or single — as well as their modified adjusted gross income that was reported on their tax return two years ago.

Pay income-related premiums? Say hello to IRMAA

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A rule called the hold harmless provision protects beneficiaries from having their benefits reduced from one year to the next due to increases in Medicare Part B premiums.

But those who pay income-related premiums are excluded from that protection. Those beneficiaries pay the standard premium plus an extra charge known as an Income Related Monthly Adjustment Amount, or IRMAA.

In 2022, individuals with income above $91,000, and married couples with more than $182,000, will be subject to additional charges.

Most people will have a high enough Social Security cost-of-living adjustment in 2022 so that their benefits will not be reduced due to Part B premium payments, according to Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League, a nonpartisan senior group.

About 11.3% of Medicare recipients reported that their net Social Security benefit in 2021 was less than received in 2020, according to a survey conducted by the group.

Typically, around 7% of beneficiaries are estimated to be affected by IRMAA, Johnson said.

Higher Medicare Part B premiums tend to reduce cost-of-living adjustments over time, according to recent research from the Center for Retirement Research at Boston College.

In 30 years, the average total Social Security benefit could hypothetically grow by 89% — to $3,600, up from $1,900, according to the Center for Retirement Research’s calculations. But once Medicare Part B premiums are included, net benefits would rise by just 60% — to $2,800, from $1,750.

Moreover, federal income taxes can also eat away at benefits. Beneficiaries with combined incomes above certain thresholds — starting at $25,000 for individuals or $32,000 for couples — may pay taxes on up to 85% of their benefits. (Combined income includes adjusted gross income, non-taxable interest income and one-half of Social Security benefits.)

Because the tax thresholds are not adjusted for wage or price growth, more beneficiaries are taxed on their benefits over time, according to the Center for Retirement Research.

Retirees who are already confronting higher costs should be strategic about making sure the doctors they visit and prescriptions they fill are covered by their Medicare plans, Johnson said.

Additionally, by consulting with a tax advisor, they can evaluate increasing their withholdings from their Social Security benefits or paying estimated quarterly tax payments can help them avoid a big tax bill later on, she said.

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