Invest·i·Vision
Social Security Recipients Get Raise
On Tuesday, October 18th the Social Security Administration announced that benefits for more than 65 million Americans will increase 0.3% in 2017. On a $1200 per month benefit that’s an extra $3.60 a month. For a $3000 benefit it is $9.00 per month. It doesn’t sound like much; but Cost-of-Living adjustments (COLA’s), are a very important part of Social Security. For many Americans, it is one source of retirement income they can’t outlive and that keeps pace with inflation.
According to the Social Security Administration, Social Security is one of three major elements of retirement income. If you have average earnings, your Social Security retirement benefits will replace about 40% of earnings. The other two retirement income elements are benefits from pensions and savings and investments.
Prior to 1975, it took an act of Congress to adjust Social Security benefits for inflation. When the automatic COLA was instituted in 1975, it was based on the Consumer Price Index, which is used as a measure of inflation. The Consumer Price Index measures price changes in goods and services purchased by consumers over the past year. This includes more than 200 categories such as food, beverages, housing, clothing, transportation, medical care, recreation, education and communication. In the past year, while food and transportation costs declined slightly, the cost of medical care was up 4.9%. (Medical care represents about 8% of spending for the average consumer; for people over 65 it represents more than 12%, according to the latest Consumer Expenditure Survey.)
Each year, in their annual report, Social Security trustees project the system’s financial operations over the next 75 years under low, intermediate, and high inflation. Their inflation projections have gradually been coming down. For example in 2008, the trustees were projecting 2.8% COLA’s under their intermediate inflation scenario. A few years ago they lowered it to 2.7%; this year’s report shows 2.6% as their long-term COLA projection.
The Social Security Administration’s COLA projections may seem high in light of today’s low inflation and recent low COLAs, but don’t forget, they are projecting economic cycles for the next 75 years. Based on their COLA table, which can be found on The Social Security Administration’s website*, the average COLA since 1975 (43 years) was 3.7%. This included periods of high inflation, such as 1980’s astounding 14.3%, as well as three no inflation years in the last decade. If we go back just ten years the COLA averages 1.7%.
Long term, Social Security COLAs are a tremendous benefit to retirees. This year’s increase won’t help the pocket book much, because if the Medicare Part B premium rises by more than the dollar amount of an individual’s Social Security COLA, the beneficiary (meaning someone receiving Social Security) will be spared the full premium increase, but his or her entire COLA will be swallowed up by Medicare premiums leaving his or her Social Security checks unchanged. This scenario will be true if you are one of the 70 percent of beneficiaries who are officially “held harmless” as a result of having their Medicare premiums deducted for their Social Security Checks in 2016. The “held harmless" provision in the Social Security Act mandates that the Medicare Part B premium increase cannot exceed any beneficiary's COLA in his or her Social Security check. As a result, the net amount of the individual's Social Security check will not decrease.
Individuals who are not “held harmless” from higher Medicare premiums will see their Medicare premiums rise. Their Social Security will go up by 0.3% but their Medicare premiums may rise much higher than that.
Who is not “held harmless” in 2017?
- People who enroll in Medicare for the first time in 2017.
- People who did not have Medicare premiums deducted from their Social Security check in 2016 (they are eligible for Medicare but not drawing Social Security and are delaying their benefits).
- People with high incomes; modified adjusted gross income over $85,000 if single or $170,000 if married.
Social Security and Medicare are complicated. There are many factors and decisions to make. COLA’s are just one component. Other key considerations are when to begin drawing, coordinating spousal benefits, survivor benefits and the impact of new legislation. As an important component of most American’s retirement it makes sense to understand the nuances. Look for more articles on Social Security coming up!
“Inflation is always and everywhere a monetary phenomenon” Milton Friedman
* To access The Social Security Administration’s website go to www.ssa.gov.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. You should discuss your specific situation with the appropriate professional
Marcy Haines CFP® is the president of Vision Wealth Management, Inc. in Baker City and a Registered Principal with, and securities are offered through, LPL Financial. Member FINRA/SIPC.