Personal finance

How Inflation, Medicare and Taxes Could Eat Away at Your Social Security Cost-Of-Living Adjustment for 2022

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  • Social Security benefits are poised to increase by a record 5.9% in 2022.
  • However, rising costs due to inflation means the extra funds may not go as far.
  • Two other items, higher Medicare Part B premiums and taxes, could also take a bite out of any increases.

Social Security's 5.9% cost-of-living adjustment for 2022 will be the biggest in decades.

But those checks likely won't go as far as inflation pushes prices higher on grocery store shelves and at gasoline pumps.

Consumer Price Index data for October shows the cost of consumer goods climbed a record 6.2% from one year ago, the biggest increase since 1990.

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And that's not the only reason monthly checks will be pinched.

Two other items — Medicare Part B premiums and taxes — tend to reduce the value of those increases for many, according to research from the Center for Retirement Research at Boston College.

Medicare Part B premiums

While the cost-of-living adjustment usually goes up every year, so do Medicare Part B premiums that older Americans pay for physician and outpatient services.

In 2022, the standard Medicare Part B premium will increase to $170.10, far above the estimated $158.50.

The record 14.5% increase was prompted by multiple factors, including higher prices.

Part B premium payments are often deducted directly from Social Security beneficiaries' monthly benefit checks.

Exactly how much someone pays for Medicare Part B depends on their income.

In 2022, the monthly premium is $170.10 for single individuals with up to $91,000 in income and married couples with up to $182,000. But those monthly rates can be as high as $578.30 per month for high income people.

From 2000 to 2020, Social Security benefits had an average annual increase of 2.2%, while Medicare Part B premiums went up by 5.9%.

In a single year, the effect of Medicare Part B premiums may be minimal, according to the Center for Retirement Research. But over time, it widens.

For example, in 30 years, the average total Social Security benefit could hypothetically grow by 89% — to $3,600, up from $1,900, according to the Center for Retirement Research's calculations. But once Medicare Part B premiums are included, net benefits would rise by just 60% — to $2,800, from $1,750.

"There is this increase in the benefit, but because it's eroded by Medicare premiums, it's not nearly fast enough to keep up with what inflation would be," said Patrick Hubbard, research associate at the Center for Retirement Research.

Of note, one rule called the hold harmless provision protects many Social Security beneficiaries from having their benefit payments reduced due to higher Medicare premiums.

Income taxes

Income from Social Security is subject to federal income taxes for certain beneficiaries.

Individuals with less than $25,000 in combined income — or married couples with less than $32,000 — do not have to pay taxes on their benefits. Combined income is calculated by adding adjusted gross income, non-taxable interest income and one-half of Social Security benefits.

Social Security beneficiaries who are above those combined income thresholds pay taxes on up to 85% of their benefits.

Those tax thresholds are not adjusted for wage or price growth. Consequently, more beneficiaries are taxed on their benefits over time, says the Center for Retirement Research.

In 1983, 8% of eligible families paid taxes on their benefits. Today, an estimated 56% of beneficiary families pay those levies.

That is expected to increase to 58% in 2030. However, if rising inflation prompts higher annual benefit adjustments, more families will pay taxes on their benefits as a result, resulting in a reduced net benefit.

"Inflation protection is good and needed, and helps a lot of retirees," Hubbard said.

"But [it] also is a little bit of a double edged sword in that it does not necessarily provide as much inflation protection or as much additional income as one might initially think on its face because of this taxation question," he said.

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