Timing, index questions, and a huge Medicare premium increase should not cloud value of Social Security’s COLA
I recently talked to one more reporter who commented that our current inflation situation must be particularly hard for retirees who “live on fixed incomes.”The fact of the matter is that Social Security is the major source of retirement income for most Americans, and Social Security provides an automatic cost-of-living adjustment to reflect increases in the Consumer Price Index . The COLA for 2022 was 5.9%, one of the largest since the 1980s .
Timing of the COLA. Since the COLA first affects benefits paid after Jan. 1 for the next year, Social Security needs to have figures before the end of the previous year. As a result, the adjustment for 2022 was based on the increase in the CPI for the third quarter of 2021 over the third quarter of 2020. This backward-looking calculation means that, when inflation starts to rise, the COLA will be less than the inflation that people are experiencing.
Interestingly, though, in the last two decades the difference between the rate of increase in the CPI-W and the CPI for the elderly has nearly disappeared . One obvious reason is that the rate of increase in the price of medical care has slowed. Another is that the population is aging so retirees constitute a much larger share of the sample.
Ultimately, Medicare administrators decided to limit Medicare’s coverage of the new drug to those enrolled in clinical trials, greatly restricting its use; and they plan to incorporate the savings in the 2023 premium.
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