Social Security still lags inflation, new study shows

Retirees will likely receive a cost-of-living increase of about 6% in their Social Security benefits next year, the biggest jump since 1982.

But if you expect to see seniors dancing in the street, you’ll have a long wait because many retirees have seen costs for everything from prescription drugs to groceries rise at a much higher rate.

A new study by the Center for Retirement Research at Boston College confirms what many seniors have long believed: The annual increase in Social Security benefits often falls short of their actual costs — particularly when it comes to health care.

A major factor is the cost of Medicare Part B premiums, which have historically increased at a higher rate than Social Security benefits, the CRR analysis found.

Medicare premiums have risen at a faster rate because the Center for Medicare and Medicaid Services uses a different formula to calculate the annual adjustment, says Patrick Hubbard, an economic research associate for the CRR.

Part B premiums are supposed to cover 25% of the projected cost of covered services, with federal government revenues covering the remaining amount. Those costs are affected not only by inflation in health care but also by increases in the quality of care and the amount of care that beneficiaries use, Hubbard says.

A “hold harmless” provision in the law prevents an increase in Part B premiums from exceeding the increase in Social Security benefits if premiums are automatically deducted from Social Security payments. Still, higher Part B premiums have reduced the amount seniors have available for non-health expenses, the study found.

Taxes could also take a bite out of the cost-of-living increase. If all of your income comes from Social Security, there’s a good chance you won’t have to pay any taxes on your benefits.

But if you have other sources of income, such as a pension or withdrawals from retirement savings accounts, you could pay federal taxes on 50% to 85% of your benefits.

Social Security taxes are based on what’s known as your provisional income — your adjusted gross income, any tax-free interest, plus 50% of your Social Security benefits. If the total is less than $25,000 and you’re single, or $32,000 and you’re married, all of your benefits are tax-free. Provisional income between $25,000 and $34,000 for singles and $32,000 and $44,000 for married couples will trigger taxes on up to 50% of your benefits. Provisional income of more than $34,000 for singles and $44,000 for married couples will subject up to 85% of your benefits to taxes.

Because half of your Social Security benefits are included in the formula, a cost-of-living increase could bump up the amount of taxes you’ll pay, Hubbard notes. “If the COLA pushes you from under $25,000 to over $25,000, you’re suddenly paying taxes on 50% of your benefits, which will wipe out a decent portion of your increase.”

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