Social Security Giveth and Medicare Taketh Away

Retirees got some good news from the US Social Security Administration, as it recently announced a 2.8% bump in benefits in 2019, the largest increase in seven years. Unfortunately, the good news also came with some bad news—higher Medicare premiums that could offset those gains. Gail Buckner, CFP, our personal retirement and financial planning strategist, takes a look at the situation.

Starting in January 2019, retirees will see their monthly Social Security checks increase by 2.8%. This is the largest cost-of-living-adjustment (COLA) increase since 2011 when we had a COLA of 3.6%1. The size of the COLA (which was 0% in 2009 and 2010) is based on the amount of inflation we’ve had from one year to the next, as calculated by the Bureau of Labor Statistics.

Specifically, Social Security looks at the Consumer Price Index for Wage Earners and Clerical Workers, or CPI-W, and is based on a year-on-year comparison of inflation—that is, it compares what it was in the third quarter of the previous year to the same period in the current year.2

The CPI-W covers a wide range of items that households commonly buy including food, medical care, shelter, energy, utilities and transportation. It turns out that during July, August and September of this year, Americans paid 2.8% more for this “basket” of goods and services than they did last year.

The problem is, this is not as neat and tidy a number as you might think. When you take a close look at the components of the CPI-W, you find that many things we bought actually went down in price compared to a year ago. This includes what we spent to buy clothing, an airline ticket or a used car or truck.3

So what caused the year-over-year spike in inflation? Don’t blame medical care! That rose less than 2% over the past 12 months. The cost of housing or “shelter” rose more than 3%. But the big culprit was the cost of energy. The price of a gallon of gasoline went up 9.1%. Fuel oil was up a whopping 23.4% over the same timeframe.

Other Numbers Impacted by Social Security’s COLA

The COLA that Social Security applies to retiree benefits also boosts several other key numbers. For instance, if you work in a job that deducts Social Security tax from your paycheck, a.k.a. “payroll tax,” in 2019 you will pay this tax on as much as $132,900 in earnings. (Earnings above this amount are not subject to payroll tax.) This year the “earnings limit” is $128,400.4

If you are under full retirement age (66 for those born between 1943 and 1954), receiving Social Security benefits and also earning income from a job, Social Security may reduce your monthly check. It depends upon whether your pay exceeds the annual “earnings limit.” Next year, the earnings limit will increase to $17,640. For every $2 above this amount, Social Security will hold back $1 in benefits. (Don’t worry! Any amount Social Security withholds is credited to your account. This will be reflected in your monthly checks once you reach full retirement age.) 5