The Government Giveth and Taketh Away
The GOOD news is that Social Security recipients will be getting a Cost of Living Adjustment beginning in January, 2012. The raise is expected to be about 3.6% which is a pretty sizeable increase. This is great news since there have been no COLA adjustments for Social Security for two years. Only twice since 1975 have there been no COLA adjustments (2010 and 2011). The largest adjustment was in 2009 and was a whopping 5.8%…the largest increase in 27 years.
The annual COLA on Social Security is determined by a formula that averages inflation for the third quarter of 2011, as reflected by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This year, the third quarter CPI-W has been running at a high as a result of energy costs. The September 30, 2011 data is expected to be released on October 19th.
According to the Social Security Administration, most retirees rely on Social Security for a majority of their income. Many rely on it for more than 90% of their income. Currently, there are approximately 60 million Social Security recipients…this will soon increase when another wave of Baby Boomers applies for their benefits in January.
The BAD news is that this raise will more than likely be consumed by the increase in premium for Medicare Part B (which covers doctor’s visits and outpatient services). This premium is automatically deducted from Social Security payments on a monthly basis. The Part B premium usually rises at a greater rate than general inflation as a result of “medical inflation.” However, by law, the premiums cannot rise in any given year by an amount greater than the Social Security COLA. The projected Part B premium for 2012 will be $111.40; an increase of $15.00.
The impact of the Part B Medicare premium on Social Security is a very vivid reminder that seniors are affected by different types of inflation; in particular the rising cost of medical care and services. Inflation is the real reason we need to have exposure equities in our client portfolios. That’s because fixed income investments alone, historically have trouble keeping pace with inflation and will eventually result in the loss of purchasing power.