The Benefit of Social Security's Luster has Suffered Two Successive Setbacks, According to Reports
For the over 68 million individuals currently receiving Social Security benefits, the second week of October is marked by no news more significant than the announcement of the cost-of-living adjustment (COLA).
Since 2002, the annual surveys conducted by national pollster Gallup have shown that 80% to 90% of respondents, including 88% in April 2024, consider their Social Security income source as "major" or "minor" and essential to cover expenses.
Despite the optimistic tone of Social Security's 2025 COLA announcement, the lack of the anticipated silver lining will quickly dim the shine off another above-average increase for beneficiaries.
How is Social Security's COLA determined?
Social Security's COLA serves as a tool employed by the Social Security Administration (SSA) to preserve benefits' purchasing power over time. In essence, if the prices of commonly acquired goods and services increase, Social Security benefits should rise by the same percentage, ensuring no loss of buying power. Social Security's COLA is the yearly raise introduced to counter the effects of inflation.
For 35 years following the delivery of the first Social Security check in January 1940, there wasn't a consistent pattern to when COLAs were implemented. After retirees didn't receive a COLA throughout the 1940s, Congress authorized the largest adjustment ever recorded in 1950: an increase of 77%!
Starting in 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) became the index used by the SSA to measure annual price changes. The CPI-W consists of more than 200 different spending categories, each with its respective weighting. These weightings allow the CPI-W to be narrowed down to a single figure at the end of each month, making for effortless year-over-year comparisons to determine if prices have risen (inflation) or reduced (deflation).
The intriguing aspect of Social Security's cost-of-living adjustment lies in the trailing-12-month readings ending in July, August, and September being used in its calculation. If the average CPI-W reading for the third quarter of the current year surpasses the corresponding period from the previous year, inflation has occurred, and a raise is on the horizon for beneficiaries.
The year-over-year percentage increase in the average third-quarter CPI-W, rounded to the nearest tenth of a percent, represents the COLA for the upcoming year.
An above-average COLA is imminent
There has been a stark contrast between Social Security recipients' experiences in the 2010s and 2020s. The 2010s featured the only three years of deflation over the last half-century, resulting in no COLA being implemented in 2010, 2011, and 2016. Moreover, beneficiaries received the smallest positive COLA in history (0.3%) in 2017.
However, COLAs have provided a meaningful boost to Social Security checks – at least in terms of nominal dollars – over the past four years. An unprecedented level of fiscal stimulus during the COVID-19 pandemic injected U.S. money supply at an unmatched pace, leading to an upward trend in inflation. The end result was a 5.9% COLA in 2022, an 8.7% raise in 2023, and a 3.2% increase in 2024. The boost in 2023 marked the highest increase on a percentage basis in 41 years.
Retirees hoping for a repeat performance in 2024 were not left feeling disappointed. On October 10, the SSA announced a 2.5% COLA would be implemented for Social Security recipients starting January 2025.
Although a 2.5% increase to Social Security checks is the smallest increase in four years, it is slightly higher than the 2.3% average COLA that has been implemented since 2010.
As per estimates from the SSA, the typical retired-worker beneficiary can anticipate a monthly payout augmentation of $49 to $1,976 in the new year. More than 75% of the program's 68.3 million beneficiaries are retired workers.
In the meantime, the average monthly check for disability beneficiaries and survivors is predicted to climb by $38 per month in 2025, respectively, to $1,580 and $1,551.
A coveted Social Security silver lining has been torn away once again
Unfortunately, not everything is as it seems with Social Security's cost-of-living adjustment.
In 2023, retired-worker beneficiaries were presented with a one-of-a-kind situation. In addition to the largest COLA on a percentage basis since 1982, Medicare's Part B premium decreased by roughly 3.1% to $164.90/month from $170.10/month. Part B is the Medicare segment responsible for outpatient services, and its premium is typically deducted from the Social Security checks of retirees aged 65 and above.
The decrease in Part B in 2023 came after one of the biggest yearly percentage increases ever recorded – a whopping 14.5% in 2022. This significant jump was a result of the introduction of Aduhelm, an Alzheimer's treatment developed by Biogen. Unfortunately, this treatment was subsequently discontinued. At the beginning of 2022, Aduhelm came with an annual price tag of approximately $28,000.
However, the Medicare program spent significantly less on Aduhelm than anticipated, resulting in a substantial boost to the Supplementary Medical Insurance Trust Fund. The funds collected in 2022 led to a reduction of about 3% in premiums for 2023. Unlike the Consumer Price Index Adjustment (COLA) in Social Security, which is designed to keep pace with inflation, this decrease in Part B premiums enabled retirees to retain a larger portion of their monthly income.
Unfortunately, retired-worker beneficiaries aged 65 and above who are enrolled in traditional Medicare have not enjoyed this benefit over the last two years. Instead, they've witnessed this positive trend fade away.
Once again, advances in Alzheimer's disease treatments are causing Part B premiums to rise noticeably. In 2024, monthly premiums will increase by 5.9%. Last week, the Centers for Medicare and Medicaid Services announced that the Part B premium will also escalate by 5.9% in the coming year, rising from $174.70 to $185.00 per month.
While a 5.9% increase in the Part B premium might be more bearable than the 14.5% surge seen in 2022, it still surpasses the 2.5% cost-of-living adjustment that beneficiaries will receive in January. Essentially, a substantial portion of the COLA will be absorbed by the swiftly rising Part B premium for most retirees.
The 2.5% COLA announced for 2025 might not go as far as expected for some retirees, as the increase in their Medicare Part B premium is anticipated to be 5.9% for the same period. In their retirement planning, individuals should consider how these finance-related changes might impact their overall retirement income from Social Security.
Without the anticipated decrease in Medicare Part B premiums, many retirees may find themselves having to allocate a larger portion of their Social Security income towards healthcare costs, potentially impacting their retirement savings and long-term financial stability. Considering the rising cost of living and healthcare expenses, it's crucial for retirees to have a well-thought-out retirement finance plan that takes into account these potential changes.
