2 Pieces of Good News for Retirees on Social Security and Medicare

Inflation has become a particularly pressing problem as it relates to retirees. The standard Medicare Part B premium jumped 14.5% in 2022. The prices of food, gasoline, and certain utilities have climbed at a double-digit pace as well. It's clear the 5.9% cost-of-living adjustment (COLA) applied to Social Security benefits in 2022 woefully underestimated the pace of inflation, putting many beneficiaries in a difficult position.

And as bad as all that sounds, the problem is actually much more serious.

Annual COLAs are intended to keep Social Security payments aligned with inflation, but an analysis from The Senior Citizens League (TSCL) shows that benefits have lost 40% of their buying power since January 2000. The recent bout of rampant inflation caused the problem to accelerate, as 10 of those percentage points of lost buying power occurred between March 2021 and March 2022.

But it's not all bad news. 2023 is shaping up to bring some much-needed financial relief. Retirees just got some good news from The Centers for Medicare & Medicaid Services (CMS), and more good news is expected from the Social Security Administration (SSA) later this week. Here's what you should know about these two bits of good news.

Image source: Getty Images.

1. Medicare Part B premiums and deductibles will drop in 2023

Eligibility for Medicare generally begins at age 65. Most seniors receive Part A coverage (inpatient insurance) for free, but they have to pay a monthly premium for Part B (outpatient insurance). Those premiums are automatically deducted from Social Security benefits.

This year, the standard Medicare Part B premium rose to $170.10 per month. For context, that figure represents more than 10% of the average benefit paid to retired workers in August. Fortunately, CMS announced that Part B premiums and deductibles will decline next year. The standard premium will drop 3% to $164.90, and the annual deductible will fall 3% to $233. That means retirees will get to keep a little more of their Social Security benefits in 2023, which should help in the fight against inflation.

That marks the first time Medicare Part B premiums have dropped since 2012, and it is only the fourth time Part B premiums dropped in the last four decades.

2. Social Security benefits should receive a big cost-of-living adjustment (COLA) in 2023

Social Security COLAs are calculated using third-quarter inflation data (July through September) as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. For instance, the CPI-W increased by 5.9% year over year in the third quarter of 2021, so a COLA of 5.9% was applied to Social Security benefits in 2022.

Unfortunately, the CPI-W continued to climb after the third quarter last year, meaning the COLA actually underestimated the impact of inflation. Put another way, retirees effectively received a pay cut this year because a larger portion of their Social Security checks was eaten away by rising prices. In fact, TSCL estimates the average benefit fell short by $43.80 each month through August.

The chart below shows the year-over-year change in CPI-W since the end of the third quarter in 2021.

Data source: Social Security Administration.

Fortunately, the opposite scenario appears to be playing out this time around. TSCL currently estimates the COLA in 2023 will be 8.7% -- the largest increase in benefits in the last four decades -- but the CPI-W has now slowed in two consecutive months. If that trend continues, the COLA applied to benefits next year will likely overestimate the impact of inflation, which should help retirees recoup some of the money they lost to rising prices this year.

That said, the SSA cannot calculate the official COLA for 2023 until the Bureau of Labor Statistics publishes its September inflation report. That will take place on Thursday, Oct. 13, 2022, at 8:30 a.m. ET.

As a caveat, it is possible for inflation to reaccelerate, so retirees and other Social Security beneficiaries should continue to budget cautiously. But right now, next year looks a little brighter.