More than halfway through a year of unending bad news, it looks as if there is a glimmer of hope that the nearly 65 million Americans who collect Social Security retirement, disability and survivor benefits will receive a 1.3% cost-of-living adjustment in 2021.
Although it would be the second-lowest COLA on record, it is an improvement over the no-COLA forecast that many were making earlier this year as a result of the devastating impact of the COVID-19 pandemic and related recession.
The forecast by Mary Johnson, policy analyst at the Senior Citizens League, is based on consumer price index data through August. “There is still one more month of consumer price data to come in before we get the official [COLA] announcement in October,” Johnson noted.
The projected COLA affects not just monthly Social Security benefits, but also the maximum amount of annual wages subject to payroll taxes.
The maximum Social Security benefit for someone who retires at the full retirement age of 66 this year is $3,011 per month. The maximum amount of wages subject to the Social Security portion of the payroll tax in 2020 is $137,700.
Should the forecast prove correct, 2021 would mark the fifth year since 2010 in which there will be an extremely low adjustment for inflation, or even no adjustment at all. The COLA was zero in 2010, 2011 and 2016 and just 0.3% in 2017. In 2020, Social Security beneficiaries received a 1.6% increase in payments.
Over the past decade, annual COLAs averaged 1.4%, less than half of the 3% average COLA in the previous decade. The modest annual inflation adjustments over the past 20 years have failed to keep up with most retirees’ expenses, particular for health care and housing, which have accelerated several times faster than overall inflation.
“This is more evidence that our system to adjust benefits for inflation is broken, Johnson said. Social Security benefits have lost about 30% of their buying power over the past 20 years, according to her research.
Under current law, the Social Security COLA is determined by the percentage change in the consumer price index for urban wage earners and clerical workers (CPI-W). The market base of goods and services that the government uses to measure inflation and calculate the annual adjustment is based on working adults under age 62 and does not reflect the costs of households of people who are retired, Johnson explained. Advocacy groups such as The Senior Citizens League have long argued that annual Social Security COLA should be tied to a special index that more closely reflects retirees’ buying habits.
The CPI-W gives greater weight to consumer items purchased more frequently by younger people, such as gasoline and electronics, and less weight to housing and medical costs, two expenses that form a bigger share of spending for older households. The COLA also excludes Medicare premiums. The Senior Citizens League has found that Medicare Part B premiums are one of the fastest-growing costs in retirement.
The extremely low COLA forecast of 1.3% for 2021 could trigger a “hold harmless” provision that protects lower-income beneficiaries from a net reduction in their Social Security benefits from one year to the next.
Medicare Part B premiums are usually deducted directly from monthly Social Security benefits. The hold harmless provision protects about 70% of beneficiaries—almost 43 million people—from increases in Medicare Part B premiums that exceed the dollar amount of their Social Security COLA. When an individual’s Medicare premium increases more than the dollar amount of his or her COLA, the Part B premium is reduced to prevent a reduction in net Social Security benefits.
When the hold-harmless provision is triggered, as it was in 2016, Congress has allowed the cost burden to shift to the remaining 30% of beneficiaries who are not held harmless. Because the cost is spread over fewer people instead of all Medicare beneficiaries, they pay a larger share of the costs, resulting in a spike in Medicare Part B premiums.
The 30% of beneficiaries who are not protected by the hold-harmless provision include new Medicare enrollees, high-income beneficiaries and people age 65 and older who are enrolled in Medicare but who have not started to collect Social Security benefits, which accounts for about 11% of beneficiaries.
Currently, most Medicare beneficiaries pay $144.60 per month for Part B premiums, which covers doctors’ payments and outpatient services. But higher income beneficiaries, including single individuals with incomes above $87,000 and married couples with joint incomes above $174,000, pay much more.
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