Only a few weeks remain before Social Security recipients find out how big of a raise they’ll receive in 2023. By all accounts, it’s going to be a huge one.
Hip, hip, hooray? Not so fast. Sure, retirees sorely need a large cost-of-living adjustment (COLA). However, it won’t be quite as helpful as some might think. Here’s the single biggest problem with your upcoming Social Security increase.
The horse is out of the barn
You’ve no doubt heard the old expression, “The horse is out of the barn.” The idea is that it’s too late to prevent damage after something has already happened.
Inflation is sort of like that proverbial horse. It’s definitely already left the barn. Retirees who depend on Social Security have seen the prices for nearly everything they regularly purchase rise significantly this year.
Social Security implemented annual COLAs in 1975 to help offset the negative effects of inflation on retirees. However, the adjustments are calculated based only on inflation levels in the third quarter of the current and previous years. They also don’t go into effect until January of the next year.
The main problem this presents for retirees is that the increased benefits don’t arrive until well after they’ve felt the sting of inflation. COLAs are certainly helpful, but they come too late to meet the immediate needs of cash-strapped seniors.
Social Security recipients will likely receive an increase in the ballpark of 9% as things stand right now. That extra money will make it easier to pay bills next year. However, it will do nothing to help make up for the higher costs that retirees incurred throughout 2022.
This isn’t the only problem related to Social Security COLAs. Not only are the adjustments too late, but they’re also arguably too little.
The Social Security Administration (SSA) uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to measure inflation. This metric factors in the prices of many products and services that people buy, including food, clothing, housing, and transportation. However, it doesn’t specifically address all of the costs incurred routinely by retirees.
Indeed, Social Security recipients have lost over 30% of their buying power since 2000 because COLAs haven’t been high enough for retirees, based on an analysis conducted by the Senior Citizen’s League. One big reason why is that the CPI-W doesn’t adequately reflect seniors’ healthcare costs.
This issue has prompted some to support replacing the CPI-W with the Consumer Price Index for the Elderly (CPI-E). The CPI-E is designed to measure the cost of living for Americans ages 62 and over. Basing Social Security increases on this inflation metric would likely help seniors cope with inflation better than the current method of calculating COLAs.
One bright spot
There is one bright spot that could make these two issues less problematic for retirees in 2023. Medicare Part B premium increases should be much lower than they’ve been.
In 2022, standard Medicare Part B premiums soared by 14.5%. A significant portion of this big jump was due to the anticipated higher costs to Medicare related to Biogen‘s Alzheimer’s disease drug, Aduhelm.
However, earlier this year, the Centers for Medicare and Medicaid Services (CMS) decided to only pay for Aduhelm for Medicare beneficiaries enrolled in clinical trials. Because of this move, 2023 Medicare Part B premiums will be reduced.
Retirees have been paying more for Medicare Part B this year than they should have. CMS couldn’t figure out a way to return money to seniors sooner “due to the legal and operational hurdles in adjusting Medicare premiums midstream in 2022.” But — at least in this case — the coming lower premiums could help put the horse back in the barn.
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