Why a big Social Security COLA hike is coming – The Hill

The story at a glance

  • Beneficiaries are benefiting from a large Social Security Cost of Living Adjustment (COLA) as inflation hits new highs this year.

  • The Senior Citizens League, a bipartisan advocacy group, estimates the COLA will reach 8.7%.

  • Additional financial relief in the form of low Medicare Part B premiums will provide seniors with another cushion.

The Social Security Administration is about to announce its largest annual cost-of-living adjustment (COLA) increase in 40 years.

The hike, to be announced on Thursday, is estimated to be around 8.7% and will help program participants cope with rising costs driven by inflation.

Between 2010 and 2020, average annual COLAs increased by only 1.7% each year, while COLAs exceeded 8.7% only three times – between 1979 and 1981 at 9.9%, 14, 3% and 11.2%, respectively.

COLAs are based on the country’s current inflation rates. In 1980, inflation was above 14%, but fell to 3.5% in the second half of the decade; COLA followed suit, falling to 5.4% in 1990.

About 70 million Americans receive Social Security benefits. The COLA hike is estimated to increase the average monthly check for retirees by about $144, according to the Senior Citizens League, a bipartisan advocacy group.

How is the COLA rate determined?

Automatic annual adjustments are based on the Consumer Price Index for Urban and Clerical Workers (CPI-W) and have occurred annually since 1975. Previously, adjustments were approved by Congress.

Because the CPI-W is such a broad measure of consumer prices, some have questioned whether the index is the best measure for determining the needs of beneficiaries, the majority of whom are retirees.

CPI-W is based on price changes of goods and services purchased by workers. Some experts have proposed replacing the CPI-W with a different measure: the CPI-Elderly. But the CPI-E, which reflects the spending habits of older people, would not always result in a higher COLA. The gap between the two measures has also narrowed in recent years.

The annual adjustment has been criticized in the past for the lag period between when inflation starts to rise and when beneficiaries receive the cushion payments. Others argue that automatic adjustment can result in COLAs higher than the rate of inflation.

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The purpose of these adjustments is to ensure that Social Security recipients retain their purchasing power in times of inflation, so that people on fixed incomes can cope with rising rents, mortgages and utility bills. grocery.

However, the large COLA could push some recipients above an income threshold, forcing them to pay income taxes on part of their benefit. Single filers with a combined income of $25,000 or less pay no tax on their benefits. For co-registrants, the threshold is $32,000.

The majority of Social Security benefits are funded by Federal Insurance Contributions Act (FICA) taxes. If a recession hits and unemployment rates rise, it could affect future COLAs. Following the 2008 recession, no COLAs were paid in 2010 and 2011.

Why is it necessary?

The simple reason why a large increase in COLA is needed now is the record inflation the country is experiencing.

“This is the highest inflation rate retirees and people with disabilities have ever seen,” said Mary Johnson, Social Security and Medicare policy analyst at the Senior Citizens League.

The majority of Social Security recipients are retirees and people aged 65 or older.

“When people are retired, if they don’t have a lot of savings – and quite a large percentage don’t – it can make things very difficult when prices go up and they don’t have any. nowhere to go to meet these rising costs,” Johnson said. said.

Data from July shows that more than half of older women living alone are poor by federal poverty standards or don’t have enough money to pay for essential expenses. This total is lower for men, at 45%.

A large portion of social security payments for elderly beneficiaries is spent on health care, housing, and food costs.

Since many medical conditions worsen with age, rising health care costs are straining the purse strings of retirees.

In general, older adults tend to have higher rates of health care utilization, while about two-thirds of older Americans view health care costs as a financial burden.

Although more than 50 million seniors rely on Medicare to cover some or all of their healthcare expenses, the extra COLA money that arrives each month may not be enough to cover the expenses of retirees.

“Social Security’s COLA will cushion the impact of inflation and put more money in the pockets of seniors. That doesn’t mean some won’t continue to struggle,” said Tricia Neuman, executive director of the Medicare Policy Program at the Kaiser Family Foundation.

“Half of all people on Medicare live on incomes below about $30,000 per person. So even with a higher than normal COLA this year, they may continue to struggle with high and rising prices for various things they need on a day-to-day basis, such as gas for their cars, rent, food and other basic necessities, and of course health expenses.

Medicare Part B premiums are deducted from Social Security checks, and this year, older Medicare beneficiaries will get additional financial relief alongside the elevated COLA.

This is due to low utilization of the controversial and expensive Alzheimer’s drug Aduhelm, which will lead to lower premiums for beneficiaries.

Typically, Part B premiums have grown three times faster than Social Security’s COLA and are one of the fastest, if not the fastest, costs in retirement, Johnson said.

Older Americans struggling to afford high drug prices will also see some relief due to the passage of the Inflation Reduction Act, which requires Medicare to negotiate with drug companies to lower prices. It caps out-of-pocket drug costs from 2025 and a $35 monthly cap on insulin prices from 2023.

“But a lot of that still needs to be put in place,” Johnson said. “Price negotiation will only cover a limited set of drugs. So there is still a considerable amount of out-of-pocket expense that older Americans will likely face for prescription drugs.

“This year’s COLA should help but does not address the more fundamental concerns of older adults living at or near the poverty line, which include a disproportionate share of people of color,” Neuman said.

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