Retirees got some good news recently, when the Social Security Administration announced there would be a 1.3% cost-of-living adjustment (COLA) for 2021. COLAs raise the size of Social Security benefits in years when a consumer price index shows costs are rising. The announcement that there'd be one next year was welcome, since it appeared for a while as though the effect of COVID-19 would mean seniors got no raise at all.

However, retirees excited at the prospect of bigger checks may have a problem. A 1.3% COLA is the smallest raise since 2017, and a portion of your added money will be eaten up by rising Medicare premiums.

This is likely to leave you with Social Security checks that aren't much bigger than you're getting now -- and that may actually be worth less in real terms. 

Older man grabbing piggy bank out of outstretched arms.

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Medicare premium increases will wipe out some of your COLA

For most seniors, Medicare premiums are withdrawn right from their Social Security checks. If your retirement benefit grows because of a COLA but Medicare premiums rise by the same amount or more, you won't end up with more take-home pay. While hold harmless provisions ensure most retirees can't end up with smaller checks, retirees aren't guaranteed to get more monthly money if rising insurance costs eat up their entire raise.

In the past, rising Medicare premiums have resulted in some seniors getting little or no extra money at all. In fact, the Senior Citizens League's recent research revealed the following:

  • Almost 65% of retirees surveyed in early 2020 said they'd received no more than $15 extra in their monthly checks after the 1.6% COLA announced in 2019 went into effect. This occurred in large part because Medicare premiums went up 6.7% in 2020 from $135.50 to $144.60. 
  • 5.7% of that group said they saw no extra money in their monthly checks in 2020 despite the COLA. 
  • 7.5% said their net Social Security benefit was actually smaller in 2020 (this can happen to some high earners). 

Although the 1.6% COLA for 2020 was bigger than the 1.3% raise announced for 2021, the Medicare premium increase will be smaller next year. The Centers for Medicare and Medicaid Services announced that the standard premium for Part B would rise by $3.90 in 2021, going from $144.60 this year to $148.50 next year. This is a much smaller increase than initially projected, thanks to Congress' addition of a clause to the latest budget deal to offset increased spending from COVID-19. 

Since rising premiums will take only about $4 off your COLA, most retirees will get some extra money -- but it won't be much. In fact, for the average retiree, the COLA will be worth around $20 more per month -- which comes down to just a $16.10 monthly increase in income after taking Medicare premiums into account. And those whose checks are below average will get even less of a bump. 

Sadly, seniors may find themselves actually losing buying power this year, even if they get a little bit of extra money in their checks. That's because COLAs are always calculated using a measure of inflation that doesn't perfectly reflect seniors' spending, and COVID-19 may have skewed this measure even further, so retirees may be getting far less money than they'd need just to stay even

There's little that retirees can do about this, since you can't control how much Social Security benefits rise or what happens with Medicare premiums. Making sure you watch your spending carefully is essential, as is maintaining a safe withdrawal rate from your investment accounts so you don't risk running out of money to provide supplementary income.

And don't start spending your Social Security raise yet, because there's a very good chance your COLA won't give you much, if any, increased spending power next year.