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Will retirees receive better Social Security benefits due to the COLA increases?

Despite a big rise in the COLA adjustment expected for 2022, the gains will be offset by the steep rise in inflation due to covid-19 spending.

Will retirees receive better Social Security benefits due to the COLA increases?

Although we are not yet in 2022, the final announcement of what the COLA will be for next year will be in October 2021. This gives those who choose what the adjustment will be less than a month to decide what the rate will be.

In 2021, the COLA rose by 1.3%, pretty standard for times of normality in the US economy. For the average retirement benefit, that amounted to $20 more per month for a total of $1,543. However, for 2022 it is projected to be radically different.

The COLA for 2022 is expected to be 6.0%, down from an estimate of 6.1% in August. From January 2022 the new average payment would be $1,628.

This doesn't mean that recipients will be seeing a 6.0% jump in money in real terms, as much of the gains will be offset by inflation. “Everything is 6% more expensive these days and is only the minimum needed to maintain the purchasing power that you’ve had all along,” Patrick Hubbard, research associate at the Center for Retirement Research at Boston College said.

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Why they won't go as far as it looks on paper

Two of the main reasons, besides inflation, for a real-terms reduction are Medicare Part B premiums and income taxes.

Medicare Part B premiums are deducted directly from Social Security beneficiaries’ monthly benefit checks. This is to pay for outpatient and physician services. Like taxes, it depends on what an individual is earning before calculating what needs to be paid.

The standard monthly premium for Medicare Part B enrollees is $148.50 for 2021, an increase of $3.90 from $144.60 in 2020.

From 2000 to 2020, Social Security benefits had an average annual increase of 2.2%, while Medicare Part B premiums went up by 5.9%. With such a hike in inflation, the average for premiums could rise as well and outpace the COLA.

As well as Medicare, income from Social Security is subject to federal income taxes.

Individuals with less than $25,000 in combined income do not have to pay taxes on their benefits. Social Security beneficiaries who are above the income threshold pay taxes on up to 85% of their benefits.

Those tax thresholds are not adjusted for wage or price growth. Consequently, more beneficiaries are taxed on their benefits over time, notes the Center for Retirement Research.

So retirees will get more money next year due to the COLA increase, but most gains are offset by inflation and price rises in tax and Medicare.


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