Come January, seniors may do a double take after seeing their Social Security checks. The 2- to 3-percentage-point increase in benefits they've been getting each year won't be there.
That's because, for the first time in three decades, the checks likely won't include a cost-of-living adjustment (COLA).
"People notice when their checks don't change," says Bruce Meyer, a professor at the University of Chicago's Harris School of Public Policy.
In the context of degraded home prices and investment losses, the change will feel like a loss to many seniors, even though benefit amounts for 2010 won't shrink.
Social Security benefits are adjusted every year to keep up with inflation, so that seniors can retain their purchasing power. Adjustments are based on the Consumer Price Index for urban wage earners between the third quarter (July-September) of the previous year and the third quarter of the current year. The 2010 COLA will be based on a period marked by sharp drops in prices and deflation.
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Still, anxious seniors should keep in mind that they will actually come out ahead of inflation.
"In a sense, older people are going to do fine because the cost of living is down and they're not going to have their benefits cut," says John Laitner, the director of the Retirement Research Center at the University of Michigan.
There's both good and bad in a flat COLA:
On the downside
The next COLA increase is in 2012: Not only won't seniors receive an adjustment for 2010, but the Social Security and Medicare trustees project no cost-of-living adjustment for 2011 and only a modest 1.4% increase in 2012. Of course, the trustees report is a forecast, and next year's report, which will take into account new data, could be revised.Rising health care costs: Older people are hit hardest by rising health care costs, says Pamela Herd, an associate professor of public affairs and sociology at the University of Wisconsin. That's because seniors are disproportionate users of the health care system and pay out-of-pocket health care costs that are about 20% higher than the population at large. So while inflation hasn't been much of a concern, health care costs are increasingly eating into seniors' Social Security checks.
Medicare premiums are rising for some: Medicare Part B premiums have increased almost every year to keep pace with the growth in Part B expenditures. (Part B insurance helps pay for some services not covered by Part A, generally on an outpatient basis.)
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For most of the 42 million Part B beneficiaries, the amount of the monthly Social Security COLA each year has been more than enough to offset the increase in the Part B premium -- resulting in net increases in benefits, according to the Kaiser Family Foundation.
But next year and in 2011, about 8% of Part B beneficiaries will be subject to higher premiums, sums that will be deducted from Social Security payments. According to Kaiser, beneficiaries will pay $104.20 a month in 2010 and $120.20 in 2011, up from $96.40 this year.
On the upside
The benefit bump: Social Security beneficiaries got an atypically large 5.8% increase in benefits in 2009 -- the biggest in more than 25 years. That outsize increase was primarily because of 2008's spike in oil prices, says Laitner. But since then the CPI increase was lost as energy prices fell. It was an excessively high COLA that raised the purchasing power of seniors' benefits, actually putting them "ahead where they should be," says Andrew Biggs, a resident scholar at the American Enterprise Institute, a nonprofit public policy group.
Seniors are better off than most: While the poverty rate increased from 2007 to 2008 and median household income fell, both indicators remained statistically unchanged for people 65 and older, according the Census report issued earlier this month. "So the official data say that group is doing quite well -- and all those numbers predated the 5.8% increase in Social Security benefits" this year, says Meyer of the University of Chicago.
This article was reported by Lisa Scherzer for SmartMoney.
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