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Change Proposed For Social Security COLA, And What Higher Inflation Means For Medicare And Social Security Beneficiaries

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Social Security beneficiaries probably will receive the highest benefit increase in years when the 2022 COLA is announced later this year.

Social Security, as you know, gives beneficiaries an annual cost of living adjustment, or COLA. The COLA is based on the 12-month change in the Consumer Price Index (CPI) through September. The Social Security Administration will calculate the COLA in early October.

Private analysts are estimating that, based on the data so far this year and what they anticipate through September, the Social Security COLA for 2022 could be 5.8% or higher. Some are forecasting a COLA above 6%.

If the COLA is anywhere in that range it will be the highest since 1983. Of course, if inflation cools off as rapidly as the Federal Reserve expects, the increase would be lower.

But some say the increase isn’t high enough and the Social Security COLAs have been too low for years.

The Social Security COLA is determined by the 12-month increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers, also known as CPI-W, as of the end of the third quarter. This is the main CPI measure that’s widely-reported in the media.

But it computes inflation on a hypothetical monthly shopping basket of goods and services for a family with children. In others words, it doesn’t represent the mix of goods and services purchased by most retirees. For example, the CPI-W overweights education expenses and underweights medical expenses compared to what a retiree is likely to spend.

There are a number of CPI measures issued by the Department of Labor.

Some analysts believe the Social Security COLA should be based on the CPI-E, also known as the CPI for the elderly. From 1982-2011, the CPI-E increased 3.1% annually while CPI-W increased 2.9% annually.

The COLA is set by law, so it would take Congress to make a change. Representative John Garamendi (D-CA) introduced a bill that would make the change. But it isn’t scheduled yet for action in Congress.

Whatever the COLA turns out to be, it could be absorbed by higher Medicare Part B premiums.

Many people don’t realize that the 2021 Medicare premium increases were artificially and temporarily restrained by one of the Covid-19 relief bills enacted in 2020.

From 2020 to 2021, the base Medicare Part B premium increased only $3.90 to $148.50 per month. Without the cap imposed by Congress, the base premium would have been $160.20.

In 2022, the temporary cap will be lifted. The normal 2021 increase will be reinstated, plus whatever 2022 increase is calculated on top of that.

A 5% increase for 2022 would cause the base premium to increase to around $168, or about 13% higher than the artificially low 2021 premium. The Medicare surtax, or IRMAA, imposed at higher incomes would increase as well.

Remember that Medicare Part B premiums are calculated to be 25% of Medicare’s estimated per-capita spending for the year. The other 75% is paid by general tax revenues.

The Social Security COLA will be announced by mid-October. The Part B premiums will be announced in November.

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