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The Sneaky Expense That Could Wipe Out Your Social Security Raise

By Maurie Backman – Aug 27, 2021 at 5:18AM

Key Points

  • Seniors on Social Security are eligible for annual raises.
  • Next year's COLA may be substantial, but one expense could eat into it heavily.

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Seniors may finally be in line for a large cost-of-living adjustment, but they shouldn't get too excited.

Social Security beneficiaries routinely rely on annual raises, known as cost-of-living adjustments, or COLAs, to increase their buying power in the face of rising expenses. But in recent years, those COLAs have been notoriously stingy.

Things are looking up for 2022, though. Thanks to a recent bout of inflation, seniors on Social Security could see their benefits increase by 6.2% next year, which would mark the largest increase in decades.

Of course, we won't be able to nail down that COLA with certainty until we collect third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Once the Social Security Administration has that information, it should announce next year's COLA in October. But based on what we know so far, a larger COLA seems very likely.

Social Security cards.

Image source: Getty Images.

But even if 2022's raise is quite generous, seniors may not get to enjoy all of it. Here's why.

Medicare premiums could rise

Medicare Part A, which covers hospital care, is generally free for enrolled seniors. But Part B, which covers outpatient and diagnostic services, charges enrollees a monthly premium that changes on a yearly basis.

Right now, the standard Part B premium is $148.50. Higher earners, however, pay more for Part B. And because we don't yet know what Part B premiums are going to look like in 2022, it's hard to predict how much of their upcoming COLA seniors will actually manage to keep.

In recent years, Medicare Part B premium hikes have outpaced COLAs. In fact, between 2000 and 2020, COLAs averaged 2.2%, while Part B premiums rose by 5.9%.

The good news is that a provision known as hold harmless prevents seniors from losing out on benefits in a year when a Medicare Part B hike exceeds their COLA. If a given senior sees benefits increase by $20 a month one year, but Part B premiums rise by $21, the most that senior will have deducted from Social Security benefits to pay that increase is $20.

But still, if next year's Medicare Part B increases are substantial, they could eat away at much of the COLA seniors are eagerly anticipating. And that's bad news for a couple of reasons.

First, many seniors have few (if any) cash reserves in the bank, and so if they don't get to keep a large chunk of their COLA next year, they might struggle to build themselves the safety net they need. In the coming years, Social Security may need to cut benefits in the absence of adequate revenue, and so it's imperative that seniors start saving for that possibility now.

Second, the whole reason 2022's COLA is looking to be larger is that the cost of common goods and services has recently gone up -- a lot. And so seniors need a higher benefit to keep up with rising food costs and other expenses.

In fact, next year's COLA may really turn out to be a mixed bag. While getting a raise is always a nice thing, the reason behind that raise could render that boost highly ineffective, as could a large jump in the cost of coverage under Medicare.

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