Inflation as measured by the same index that’s used to calculate the annual cost-of-living adjustment (COLA) for Social Security (CPI-W) was 6.3% through December, according to the latest batch of Consumer Price Index figures released today by the Bureau of Labor Statistics.
That’s lower than the new 8.7% COLA increase that Social Security beneficiaries saw starting this month. That has Mary Johnson at The Senior Citizens League wondering, will 2023 be the year that seniors finally catch up?
“Before anyone can answer that question, we first need to have a measure of just how far Social Security benefits fell short due to cost-of-living-adjustments that didn’t match up to actual inflation,” says Johnson, Social Security and Medicare policy analyst for TSCL.
Her new analysis indicates that since the start of the COVID-19 pandemic in 2020, Social Security benefits have fallen short of COLAs by about $1,054 on average through 2022. Johnson calculated how much benefits would have needed to increase each month from January of 2020 to December of 2022 to keep pace with actual inflation and compared it to the amount of the average COLA.
Catching up this year is uncertain because that will depend on prices coming down significantly. The moderation of inflation just announced would shrink the shortfall, by only about $38.70 for the month before the deduction for Medicare Part B premium, which is $164.90.
The analysis found:
• In 2020, the 1.6% COLA kept pace with inflation, but only after March, when COVID-19 shut down the economy, gasoline prices plummeted, and deflation temporarily set in. Average benefits ended the year ahead by $53 prior to deductions for Medicare Part B premiums. The Medicare Part B premium however, was $144.60 per month an increase of 6.7% over the previous year. Annual Medicare Part B premium costs of $1,735.20 ate up the $53 that exceeded inflation.
• In 2021, the 1.3% COLA left Social Security recipients with virtually no inflation protection, falling behind on average by 261% per month. In terms of dollars, the average benefit fell behind by $612 for the year, or $51 per month. This was prior to the deduction for Medicare Part B premiums of $148.50 per month, and $1,782 for the year.
• In 2022 ,the 5.9% COLA fell short on average by 46% per month. In terms of dollars, average benefits fell behind $495 for the year or by $41.25 per month. Again, this was prior to the deduction for Medicare Part B premiums of $170.10 per month and $2,041.20 for the year—one of the largest increases in Medicare program history.
Add the three years’ shortfall all up, and you get the aforementioned figure of $1,054.
What older Americans will spend on healthcare in 2023
According to surveys conducted by TSCL, in 2023, here’s what older Americans will spend on healthcare this year:
• 50% of Medicare beneficiaries will spend up to $4,800 for premiums, out-of-pocket costs, and for services such as dental and eye exams that are not covered by Medicare.
• 30% will spend more than $4,800, up to $12,828.
• 20% will spend more than $12,828—particularly those who need costly long-term care, hospitalization, or to undergo therapies for very serious chronic health conditions.
The estimates are based on answers provided by more than 3,000 participants.
More to watch out for
Social Security recipients can owe taxes on a portion of their Social Security benefits when their “combined income” is greater than $25,000 (single filers) or $32,000 (couples filing jointly.
A growing percentage of older taxpayers are hit with the tax on Social Security every year because the income thresholds subjecting benefits to taxation are fixed, unlike tax brackets which are adjusted for inflation. Had these income thresholds been adjusted since the tax on Social Security benefits became effective in 1984, the $25,000 level today would be about $73,040 and the $32,000 level would be $93,491.
According to a recent survey by TSCL, 57% of respondents are worried that they would pay taxes on a higher portion of their Social Security benefits this year. More than one out of five is concerned they may pay the tax on their Social Security benefits for the first time this year due to the 5.9% COLA.
Here’s the formula to determine whether Social Security benefits are taxable:
Adjusted gross income + non-taxable interest + one half of Social Security benefits = “combined income.” More info can be found here: https://www.ssa.gov/benefits/retirement/planner/taxes.html.
SEE ALSO:
• 2022 Social Security COLA Falling Well Short of Inflation
• Historic 8.7% Social Security COLA Finalized for 2023
• Just How Much a Retiree Will Spend on Healthcare: Milliman