Inflation Picture May Mean Smaller Social Security Checks for Some Retirees

Each year’s cost-of-living increase for Social Security is based on the average annual change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).  This calculation is done each October, based on the CPI-W figures for the prior three months.  For 2008, the average reading on the CPI-W was 215 during the July – September period, compared to 203 for the same three months in 2007, resulting in the 5.8% increase in Social Security checks for 2009. 

The downside to this large increase is that, by law, Social Security recipients will not see another cost-of-living increase until the CPI-W rises above the level on which this adjustment was based – 215.  Even accounting for the government’s many efforts to re-inflate the economy in recent months, the Congressional Budget Office projects that the CPI-W will not return to this level until 2012, delaying the next increase in Social Security checks to January 2013.  If Medicare costs continue to increase, the disappearance of the Social Security cost-of-living adjustment may actually mean smaller benefit payments for many (about 11 million) retirees.

Because of the way the Medicare rules are written, high-income beneficiaries now are responsible for a higher portion of their Medicare costs.  Medicare imposes an income-related premium adjustment on recipients whose income exceeds $85,000 for a single person and $170,000 for a married couple.  A “hold-harmless” provision in the law guaranteeing that a Social Security benefit check will not decrease as a result of an increase in the Part B premium will protect beneficiaries with incomes below these thresholds.  Because of this “hold-harmless” rule, a larger portion of any Medicare cost increases will be borne by high-income beneficiaries, at least until the Social Security cost-of-living adjustments come back into play.  According to Congressional Budget Office estimates, the monthly Part B premium will rise from its current level of $96.40 to $119 in 2010, not including the income-related adjustment imposed on high-income beneficiaries.