Positive News for Social Security

Inflation has become a particularly pressing issue for retirees. The standard Medicare Part B premium increased by 14.5% in 2022. Prices for food, gas, and some utilities have also increased at a double-digit rate. Clearly, the 5.9% cost-of-living adjustment (COLA) applied to Social Security benefits in 2022 woefully underestimated the pace of inflation, putting many beneficiaries in a difficult position.

And as bad as it sounds, the problem is actually much more serious.

Annual COLAs are intended to keep Social Security payments in line with inflation, but an analysis by The Senior Citizens League (TSCL) shows that benefits have lost 40% of their purchasing power since January 2000. The recent bout of rampant inflation caused the problem to accelerate. , as 10 of those percentage points of loss in purchasing power occurred between March 2021 and March 2022.

But not all are bad news. 2023 is shaping up to provide much-needed financial relief. Retirees just received good news from the Centers for Medicare and Medicaid Services (CMS), and more good news is expected from the Social Security Administration (SSA) later this week. Here’s what you should know about these two pieces of good news.

1. Medicare Part B premiums and deductibles will drop in 2023

Eligibility for Medicare generally begins at age 65. Most seniors get coverage for Part A (hospitalization insurance) for free, but have to pay a monthly premium for Part B (outpatient insurance). These premiums are automatically deducted from Social Security benefits.

This year, the standard Medicare Part B premium increased to $170.10 per month. For context, this figure represents more than 10% of the average benefit paid to retired workers in August. Fortunately, CMS announced that Part B premiums and deductibles will decrease next year. The standard premium will drop 3% to $164.90, and the annual deductible will drop 3% to $233. That means retirees will be able to keep a little more of their Social Security benefits in 2023, which should help fight inflation.

This is the first time that Medicare Part B premiums have fallen since 2012, and it is only the fourth time that Part B premiums have fallen in the last four decades.

2. Social Security benefits should get a big cost-of-living adjustment (COLA) in 2023

Social Security COLAs are calculated based on third quarter (July through September) inflation data as measured by the Consumer Price Index for Urban Wage and Office Workers, or CPI-W. For example, the CPI-W increased 5.9% year-over-year in the third quarter of 2021, so a 5.9% COLA applied to Social Security benefits in 2022.

Unfortunately, the CPI-W continued to rise after the third quarter of last year, meaning the COLA underestimated the impact of inflation. In other words, retirees have effectively taken a pay cut this year because a larger portion of their Social Security checks were eaten up by rising prices. In fact, TSCL estimates that average profit fell by $43.80 each month through August.

The chart below shows the year-on-year change in the CPI-W since the end of the third quarter of 2021.

Source: Social Security Administration.

Fortunately, this time the opposite scenario seems to be playing out. TSCL currently estimates COLA in 2023 to be 8.7%, the largest increase in profits in four decades, but the CPI-W has now slowed for two consecutive months. If this trend continues, the COLA applied to benefits next year will likely overestimate the impact of inflation, which should help retirees recoup some of the money they lost to higher prices this year.

That said, the SSA cannot calculate the official COLA for 2023 until the Bureau of Labor Statistics releases its September inflation report. It will take place on Thursday, October 13, 2022 at 8:30 am ET.

As a caveat, inflation may accelerate again, so retirees and other Social Security recipients should continue to budget cautiously. But right now, next year looks a little brighter.