Annual cost of living adjustments are an important feature to the Social Security program but their value is undercut in several ways, according to a report from the Center for Retirement Research.
“A spurt in inflation, however, affects two factors that determine the net amount that retirees receive from Social Security. The first is the Medicare premiums for Part B, which are deducted automatically from Social Security benefits. To the extent that premiums rise faster than the COLA, the net benefit will not keep pace with inflation,” it said.
It said that while the average Social Security COLA over 2000-2020 was 2.2 percent, the average increase in Medicare Part B premiums in that time was 5.9 percent. “The difference between these increases may be minimal in a single year” but adds up over time, it said, adding that “the impact of rising Part B premiums would be even greater for high-income individuals, because their premiums constitute a larger share of their Social Security benefits.”
The second factor, it said, relates to taxation of Social Security benefits. Individuals with less than $25,000 and couples with less than $32,000 of “combined” income–adjusted gross income plus nontaxable interest income plus one-half of Social Security benefits–don’t have to pay taxes on those benefits. Above those levels, benefits are up to 85 percent taxable.
“Because the thresholds are not increased in response to either wage or price growth, more and more beneficiaries are being taxed on their Social Security benefits over time . . . When the taxation of benefits was first introduced in 1983, only 8 percent of eligible families paid taxes on their benefits. Today, the estimate is that 56 percent of beneficiary families pay taxes on their benefits,” it said.
That impact becomes more severe with higher inflation, it added.
“In short, even Social Security does not fully insulate older households from inflation’s erosive impact,” it said.