Social Security Benefits and Inflation: 4 Key Points

Economists and financial planners alike are tuned into the Social Security Administration in expectation that they will announce an increase of benefits, expected to be 6% beginning in January of 2022. This is known as the COLA (cost of living adjustment) and is one of the largest adjustments in 20 years, (something which we will table for another blog post).

Social Security increases with inflation, which protects a lot of retired folks from the effects of inflation on their financial freedom in later years. Living an additional 20-30 years without an increase in income would be devastating when food, healthcare, and gas are increasing faster than they have in a long time.

There are drawbacks, however, to the increase of benefits that retirees should know about, especially when incorporating this information into their retirement and financial plans.

1.       Net Benefits will not keep pace with Inflation

The Center for Retirement Research out of Boston College published a study on the impact of inflation on Social Security benefits and found that the net benefit of Social Security increases will be diluted by two factors: taxes and Medicare.

Medicare premiums have been rising at a faster rate than increases in benefits, and Plan B payments are taken out of Social Security, thus diminishing their power.

2.       Medicare Premiums

Medicare premiums for Part B are deducted from Social Security benefits before they arrive to the recipient or retiree and increase “each year in line with Part B per capita expenditures.” If premiums for Medicare rise an expected 5.9%, it means that the amount you receive from Social Security benefits is less than the increase in inflation. Instead of growing 2.2% with inflation, net benefits would grow 1.6%.

This effect is aggravated for high-income individuals because their premiums consist of larger shares of their Social Security benefits.

3.       Taxation

Taxes also impact Social Security benefits and the net increase received by retirees. Taxes on benefits were first introduced in 1983. Only 8% of eligible families paid taxes on their benefits at the time. That number has risen to a whopping 56% and that number is expected to rise.

4.       Conclusion: Income Generation

As a result of all these measures, the net benefit of increasing benefits of Social Security may not be enough to cover the harmful effects of elevated inflation. Social Security is already not enough retirement income for many families and household, and that will only get worse with inflation, increases in Medicare premiums, and taxation. Having income generation as part of your financial plan may be vital, especially in your retirement.

Don’t forget to catch the Emergent Financial Services team on Today y Mañana every Thursday at 10:15 am on the i Love Cville network! Watch on Facebook, Instragram, and YouTube live, or listen in on Apple music and Spotify.

Until next time, I’m Nickolas Urpí from Emergent Financial Services,