If you’re retired, and have started to collect Social Security you may want to skip this week’s news and go out and enjoy the fall weather that has arrived in New England. In the news are two announcements that can and will affect retirees- specifically those who collect Social Security and/or Medicare.
Changes to Social Security
Early Thursday morning it was announced that there will not be a cost-of-living adjustment to the checks retirees receive from the Social Security Administration (SSA). This will mark just the third time this occurred since they adopted the current method of increasing payments based on the Consumer Price Index (CPI).
As any retiree can attest, the most frustrating part of this news is that all three times of no increase have occurred in the last ten years. The first time occurred in 2010, followed by 2011 and now 2016. Since the SSA adopted this approach of using the CPI, the 40 year average annual increase in benefits has been about 4.1%. However, this doesn’t’ accurately reflect the experience of the current baby boomer retirees. In fact, over the last 10 years, Social Security checks have seen an average increase of only about 2%, or less than half of the 40 year average.
In my opinion, the reasoning for the lack of increase for next year is somewhat disingenuous. The government is pointing to the dramatic reduction in the price of oil and gas as the justification for the lack of increase. That’s fine, unless you are like many retirees that I know, including my own 88 year old grandmother- they don’t even drive! And even for those who do still drive, the average retiree isn’t logging hundreds of miles that would be needed to really notice the benefits of lower prices at the pump.
For certain, retirees in New England may have enjoyed a drop in the cost to heat their homes in the winter, but for those in Florida or other warmer climates, the “savings” from lower energy prices have been felt even less. Studies have shown that for many retirees the costs associated with transportation (car payments, car insurance, vehicle maintenance and fuel costs) rank behind costs associated with other items such as health care, food and housing. The reality is that the government inflation method doesn’t accurately reflect how retirees actually spend their social security checks. Nor does it reflect that even mild inflation in some retiree’s spending habits is not significantly offset by the savings from gas prices.
Changes to Medicare
The announcement of a 0% increase to the Social Security benefits could cause a domino effect for some folks who are on Medicare. Depending on a retiree’s benefits, up to a third of those currently on Medicare could see their health care costs skyrocket…but wait, I thought they said there was “no inflation”?
Unless Congress intervenes and changes the current rules, some retirees could see their Medicare bill increase by 50%! Not everyone on Medicare will be affected because of a rule that limits increased cost for Medicare, typically referred to as the “Hold Harmless” rule.
This provision states retirees’ Social Security benefits CANNOT decrease due to rising Medicare Part B premiums. The rule states that, at worst, the Medicare increase is capped by the cost-of-living increase to the checks from Social Security. The government had already announced that Medicare costs would be rising for 2016. If every retiree was subject to the cost increase, the premium would have gone up 15% from $104.90 a month to $120.70.
Now that the “Hold Harmless” rule has protected a large portion of those on Medicare, it means those NOT covered must bear the entire brunt of the cost increase. Should nothing change, those Medicare recipients, who are NOT covered by the “Hold Harmless” rule could see their monthly cost jump from $104.90 to $159.30, an almost 52% increase.
Is there any help on the way?
Lobbyists for retirees have been trying to encourage Congress to extend the “Hold Harmless” caveat to all of those on Medicare. Until today’s announcement of a 0% increase in the Social Security Benefits, there hasn’t been much of a reason for Congress to focus on something that wasn’t a foregone conclusion. Now that the dramatic increase will occur if nothing is changed, I suspect Congress may feel more compelled to address the “Hold Harmless” provision.
From a longer view standpoint there has been a discussion about changing the way inflation is calculated in determining the cost-of-living increases for Social Security. The methodology used by our government to calculate inflation has been a constant source of argument. The Bureau of Labor Statistics (BLS) is the government run department that collects, analyzes and disseminates, amongst other things, the CPI. Back in 1994, the BLS started calculating a CPI-E, or Consumer Price Index for the Elderly. The data gathering is identical from the traditional CPI, however areas of spending are weighted differently to try and portray a more accurate reflection of retirees spending habits. For example, the CPI-E overweighs the Health Care component, and lowers the education spending habits for retirees. In fact as I alluded to in the beginning of this article, this Elderly index also lowers the weight that transportation costs have on the lives of retirees, when compared to those currently working.
While adoption of this index hasn’t yet been discussed widely, there has been a growing chorus amongst our elected officials to investigate the use of this index to adjust the Social Security benefits. With an election year coming up, if the Medicare price increase does occur I would expect this may come up as a topic for debate.
Derek Amey serves as Managing Director and Portfolio Manager at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail him at firstname.lastname@example.org.
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