On Retirement

Seniors squeezed by no Social Security increase

Official inflation measure ignores retirees' biggest costs; Medicare hike a focus

Oct 13, 2015 @ 12:01 am

By Mary Beth Franklin

By the time the Social Security Administration makes its official announcement about 2016 benefit levels later this week, it will be old news.

As I reported in early August, there will be no increase in Social Security benefits next year as inflation over the past 12 months has been too low to trigger an automatic cost-of-living adjustment.

This will mark the third time that seniors have received no increase in their Social Security benefits since automatic COLAs were enacted by Congress in 1975. The first two times were in 2010 and 2011.

This week's drama will instead focus on a simultaneous announcement by the Center for Medicare and Medicaid Services regarding how much retirees will pay for their Part B Medicare premiums, which covers a portion of the cost for doctors' visits and other outpatient services.

Although the majority of Medicare recipients will continue to pay the same $104.90 per month base amount for Medicare Part B in 2016 as they did this year, some beneficiaries could see their monthly premiums increase by as much as 52% starting in January.

Those affected by the Medicare premium hike are retirees whose income tops $85,000 if they are single or $170,000 if married; new enrollees in Medicare 2016; and anyone who is enrolled in Medicare but not yet receiving Social Security benefits, including those who elected to file and suspend their benefits. Medicare premiums in 2016 will be based 2014 income, including tax-free interest.

DIFFERENT INFLATION MEASURES

The problem with the annual Social Security COLA determination is that the way the government tracks inflation does not necessarily reflect how most retirees spend their money.

The Social Security Administration determines the annual COLA based on the Consumer Price Index for Urban Wage earners and Clerical Workers (CPI-W) compiled by the Bureau of Labor Statistics. This index reflects the prices of goods and services purchased by a typical household of urban wage earners. In the past 12 months, these prices have dropped, driven mainly by falling energy costs.

Retirees have different spending patterns than urban wage earners, noted Polina Vlasenko, a senior research fellow at the American Institute for Economic Research.

“They consume more medical care but spend less on education and gasoline than urban wage earners,” Ms. Vlasenko noted in a recent report. “In an ideal world, the Social Security COLA would be based on an index that reflects the spending pattern of retirees.”

The closest, though not ideal, measure of inflation for retirees is the Consumer Price Index for Americans 62 years of Age and Older (CPI-E), an experimental index that BLS has compiled since the early 1980s. In the 12 months ended Aug. 30, 2015, the CPI-E increased 0.65% compared with a 0.3% decline in the CPI-W, which is used to calculate Social Security COLAs. Historically, the CPI-E tends to be about 2% higher than the government's official measure of inflation.

Rep. Alan Grayson, D-Fla., claims the government's reliance on the CPI-W, rather than the experimental CPI-E, has cost seniors $388 billion in Social Security benefits since 1982. He has introduced legislation known as the “Seniors Deserve a Raise Act” that would allow the Social Security Administration to use the CPI-E to determine COLAs. A similar bill, the CPI-E Act of 2015, was introduced by Rep. Michael Honda, D-Calif.

NO CHANGE IN BENEFITS

In an August memo to Mr. Grayson, Congressional Research Analyst Noah Meyerson noted that basing COLAs on the CPI-E would not alter people's benefits when they are first eligible to receive them, but it would increase their benefits in subsequent years because the annual COLAs would be larger on average. The effect would be greater the longer people received benefits.

From 1975 through 2014, when automatic COLAs were in effect, Social Security benefits totaled $14.8 trillion. Had annual cost of living adjustments been based on the experimental CPI-E rather than the official inflation measure of the CPI-W, benefits would have been $400 billion higher, according to Mr. Meyerson's calculations.

While the academic debate over the true measure of inflation for seniors is interesting, it is not likely to have any impact on the size of benefits in the near future. GovTrack, a nonprofit organization that monitors legislation, projects that these and similar bills have a 0% chance of being enacted.

Switching inflation measures would also add to the long-run cost of the program which is already slated to exhaust it surplus trust fund revenues in 2034. Unless Congress acts before then, Social Security benefits, which by law must be financed through earmarked payroll taxes rather than general revenues, would have to be cut by 23%.

(Questions about Social Security? Find the answers in my ebook.)

Mary Beth Franklin is a certified financial planner.

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