Social Security is set to give out the biggest hike in benefit payments since 1981 and it’s going to be even larger than last year’s 5.9% raise. Drumroll please. Starting in January, benefits will rise a whopping 8.7%.
Hands down, inflation has been the financial focus of the past year. It has impacted both stocks and bonds in a severe way. With bonds failing to provide stability for investment portfolios, it’s not uncommon for conservative investors to see their portfolio down about 20% for the year. It’s been ugly and any good news is welcome.
Thankfully, for retirees, there is a silver lining. Since 1975, Social Security has been automatically and annually adjusting benefit payments to offset inflation’s bite. Not surprisingly, this policy was put in place at a time of high inflation. Clearly the political pressure of giving discretionary raises to voters (I mean, retirees!) was too much to bear. The solution? Automatic adjustments, by law.
The 8.7% inflation hike in Social Security benefits translates into a raise of $160 per month for the average beneficiary. Adding to the good news, for the first time since 2012, the monthly Medicare Part B premium that is deducted from Social Security checks will decrease by about $5 per month. Bottom line, there’s soon going to be more money in the pockets of retirees.
A common question for those not yet collecting Social Security is whether they, too, will benefit from this 8.7% inflation adjustment. It depends.
If you are over the age of 62, the answer is, yes. This is true for those who are receiving benefits and for those who are eligible, but choosing to delay their filing in return for a higher benefit later on. For this group, the annual inflation adjustment is built directly into their benefit formula.
If you have not yet reached age 62, things are more complicated. For this group, your benefits are based on your earnings history. After ranking the best 35 years of your earnings, Social Security does adjust each year using a different time of inflation adjustment. Specifically, they use a national average wage index. To properly calculate a person’s average earnings over an entire career, those earnings way back in 1985 must be put “on par” with today’s average prevailing wage level.
Now, historically the national average wage index has grown faster than the inflation rate used by Social Security in setting current benefits. But, you guessed it, not this year! So, for those under age 62, your projected Social Security benefit will not quite see the 8.7% bump. Life’s not entirely fair, I suppose.
To learn more about Social Security, plan to attend the Money Series at Leland Township Library on Tuesday, November 15 at 3pm. Register at MoneySeries.org.
Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com