Millions of seniors today depend on Social Security to pay their bills in retirement. But those benefits may end up letting a lot of people down. Here's why.
1. Cost-of-living adjustments have been stingy
Seniors on Social Security are entitled to an annual raise known as a cost-of-living adjustment, or COLA. The purpose of COLAs is to help seniors maintain their buying power when living expenses inevitably rise.
But over the past 12 years, Social Security COLAs have averaged just under 1.4%. That's hardly been enough to keep pace with inflation.
Now the good news is that in 2022, seniors may be in line for their largest COLA in over a decade. That's because the cost of gas and other common goods and services has risen drastically this year.
But all told, there's a flaw in how COLAs are calculated. COLAs are based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W, however, is not an accurate measure of how seniors spend their money, and so recent raises haven't been reflective of retirees' rising costs.
2. Medicare premiums keep wiping out raises
Seniors on Medicare are typically entitled to free coverage under Part A, which pays for hospital care. But Part B, which covers outpatient care, charges a monthly premium that tends to rise from year to year. For seniors on Social Security, those Part B premiums are deducted from their benefits automatically.
The problem is that Medicare Part B premiums keep going up, and some years, they've all but wiped out seniors' COLAs. In 2022, seniors might manage to keep more of their COLAs due to the larger raise they're likely to get, but even that's yet to be determined, as we don't know what Medicare premium hikes will look like going into the upcoming year.
3. The thresholds for taxes on benefits haven't been adjusted for inflation or wage growth
Seniors whose sole income source is Social Security generally avoid taxes on their benefits. But seniors who are moderate earners do, in fact, face taxes.
Tax liabilities are based on provisional income, which is calculated as 50% of one's annual Social Security payments plus all of one's non-Social Security income for the year. For singles, taxes on up to 50% of benefits apply once their provisional income exceeds $25,000. For married couples, that threshold is slightly higher at $32,000.
Meanwhile, singles with a provisional income of over $34,000 face taxes on up to 85% of their benefits. The same applies to married couples with a provisional income of $44,000.
The problem, though, is that these income thresholds were put into place decades ago, and they haven't been updated since to account for rising living costs or wage growth. As such, seniors have been getting robbed of benefits and will continue to be until something changes.
Unfortunately, Social Security isn't perfect, and it's seniors who have been paying the price for a long time. It's important that current workers recognize the program's limitations and take steps to save aggressively for retirement on their own. Consistently funding an IRA or 401(k) plan could make it so that seniors are less reliant on Social Security -- and more financially stable once their time in the workforce comes to an end.