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The Social Security and Medicare programs provide monthly income and health insurance to millions of retired Americans, but many beneficiaries still struggled with financial hardships in the past year. The standard Medicare Part B premium rose 14.5% (or $21.60) to $170.10 per month in 2022, marking the largest price hike in history in terms of nominal dollars. More broadly, the 5.9% cost-of-living adjustment (COLA) added to Social Security checks in 2022 underestimated the impact of inflation, causing benefits to lose buying power.
Fortunately, retirees should see some financial relief next year. In September, the Centers for Medicare and Medicaid Services (CMS) announced that Medicare Part B premiums will decrease in 2023, an event that has only happened three other times in the last four decades. More recently, the Social Security Administration (SSA) announced an 8.7% COLA for benefits in 2023. That is the biggest COLA in the last four decades, and the fourth-biggest COLA in history.
Individually, those events are rare, but together, they represent history in the making. Never before has such a large COLA coincided with a drop in Part B premiums, and it may never happen again in our lifetime, according to Mary Johnson, the policy analyst for The Senior Citizens League.
Here’s why that historic event is good news for retirees on Social Security and Medicare.
Image source: Getty Images.
Social Security benefits lost buying power in 2022
Social Security COLAs are intended to shield benefits from the effects of inflation. There are many ways to measure inflation, but the metric used by the SSA is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The calculation is straightforward: The third-quarter CPI-W in the current year is compared to the third-quarter CPI-W from last year, and the percent increase (if any) becomes the COLA for the next year.
So a 5.9% COLA was applied to Social Security benefits in 2022, because the CPI-W increased 5.9% in the third quarter of 2021. Unfortunately, inflation this year has eclipsed 5.9% in every month to date, meaning Social Security benefits lost their buying power.
The chart below shows inflation data for each month in 2022 so far.
Month (in 2022)
Inflation (Change in CPI-W)
January
8.2%
February
8.6%
March
9.4%
April
8.9%
May
9.3%
June
9.8%
July
9.1%
August
8.7%
September
8.5%
Data source: Social Security Administration.
Based on the data above, the CPI-W increased at an average rate of 8.9% per month between January and September, meaning the 5.9% Social Security COLA needed to be three percentage points higher.
How much difference does that make? The average monthly benefit paid to retired workers was $1,681 in 2022, but that figure should have been $1,730. That means the average benefit paid to retired workers was short by roughly $50 per month (or $450 year to date) through September.
Additionally, Medicare Part B premiums are typically deducted directly from Social Security checks, so the 14.5% increase (i.e. $21.60) in Part B premiums was yet another headwind to Social Security benefits for many retired workers.
Social Security benefits could regain some buying power in 2023
Next year, the combination of a lower Medicare Part B premium and an 8.7% COLA should restore some of the buying power Social Security benefits have lost.
In 2023, the standard Medicare Part B premium will fall 3% (or $5.20) to $164.90 per month, and the average Social Security benefit paid to retired workers will rise $146 to $1,827 per month. That means the average retiree on both Medicare and Social Security will effectively get an extra $151.20 each month next year.
Of course, whether that extra cash is truly “extra” depends on the trajectory inflation follows going forward. If rising prices reaccelerate, retirees may once again find themselves facing financial hardships. Fortunately, the CPI-W’s rise has now decelerated for three consecutive months, meaning inflation is starting to cool. If that trend continues, retirees on Medicare and Social Security should indeed get a little extra mileage out of their benefits next year.
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