No COLA For 2016?
I've often warned about the need to find a strategy hedged against the risk of inflation. It seems that the Social Security Administration is proving me right. My Mitzi would probably say, Even a blind squirrel can find a nut, but I'd like to believe that this is just another time when it pays to be observant and cautious.
Why am I writing about this now? Well, there is a good indication that Social Security checks will not get a Cost of Living Adjustment next year. Even worse, with Medicare premiums on the rise, some high income retirees may even see a net reduction in their Social Security payments.
An official announcement on this from the Social Security Administration likely won't be made until later this fall, giving retirees just a few months before their January checks feel the brunt of this decision.
So why is this happening? Generally, since 1975, Social Security benefits have received COLAs (cost of living adjustments) each year automatically. This is to keep benefits in line with inflation, maintaining a consistent buying power year after year. The exact adjustment each year is based on a calculation of the Consumer Price Index for an urban wage earner, comparing the previous year's third quarter, to the current year's third quarter. That's the important part: third quarter to third quarter. Since inflation has slowed over the past 12 months, we don't expect the Consumer Price Index to be higher for this year's 3Q than it was for last year's 3Q.
No increase means no COLA. No cost of living adjustment means no increase in benefits for 2016. No increase in benefits means a decrease in your purchasing power.
A new report released by the Social Security and Medicare trustees came to the same conclusion.
Since 1975, when COLAs were initiated, there have been only two years without any, in 2010 and 2011. (If you were collecting Social Security back then, you may remember those years without fondness.) Following those two flat years, 2012 found itself with a 3.6 percent COLA jump. A similar COLA of 3.1 percent is projected for 2017, but that seems awfully far away for most retirees.
Not only that, but as mentioned above, some higher net worth retirees may actually be facing a decrease in their benefits due to the way that Medicare factors in to the Social Security payments.
Most people know that Medicare Part A, which, among other things, covers hospital care, is free. The premium for Medicare Parts B and D, on the other hand, are based on modified adjusted gross income and are deducted from monthly Social Security benefits. For many, in 2015 the Part B premium took about a hundred bucks from that check each month. But those folks with a modified adjusted gross income of more than $170,000 for a couple, or $85,000 for single filers, are already paying more. Furthermore, that same report from the trustees cited an expected 52 percent increase in Part B premiums in 2016, although an exact number won't be reported until, again, later this fall.
If this is the case, most retirees will be shielded by what's called the hold harmless provision that was written into the Social Security Act specifically for this situation, prohibiting any Medicare premiums from being increased more than the previous year's Social Security COLA. But for every rule, there are exceptions. That provision doesn't protect everyone. Those who are subject to Medicare premium surcharges, are newly entitled to Social Security in 2016, or haven't yet started to collect benefits, will be subject to the higher premiums.
So why is this important to you? And by you, I mean all David's Family Finance readers, no matter your age. Uncle Sam has been on a spending spree for years. Frankly, he is broke. If you have never visited the website www.usdebtclock.org you should take a look. It shows our unfunded liabilities here in the United States to be about $100 trillion. As I have asked you, in the past, where is Uncle Sam going to get the money? Well, the government can either raise taxes or decrease benefits. So in my opinion, no matter what demographic you fall into, you are going to be affected.
Folks, the moral of this story is this: many older retirees will find themselves with a net reduction in their Social Security benefits next year. A reduction in benefits, paired with inflation, results in a pretty significant loss of buying power in the coming years. It's now more important than ever to find a financial strategy that not only helps to protect a portfolio from volatility and downside risk, but must hedge against inflation.