Social Security Hike Largest in 26 Years

More than 34.9 million older Americans will get a 5.8 percent increase in their Social Security benefits next year—the largest hike in 26 years.

Rising inflation drove the 2009 cost-of-living adjustment (COLA) to greatly surpass this year’s 2.3 percent raise. The 5.8 percent adjustment is the highest since 1982.

And in more welcome news, the standard Medicare premium for 2009 will remain unchanged from $96.40. Premiums will rise only for single people earning more than $85,000 annually, or for couples earning more than $170,000.

Still, recipients won’t come out ahead by much, says Alicia Munnell, director of the Center for Retirement Research (CRR) at Boston College. Because Medicare Part B premiums—deducted automatically from Social Security benefits—generally rise faster than the COLA, “the net benefit will not keep pace with inflation,” she wrote in a brief issued today.

From 2000 to 2007, Medicare premiums rose faster than the COLA—9.8 percent per year compared to 2.7 percent, she pointed out in the brief, which was coauthored by Dan Muldoon, a CRR research associate.

David Certner, legislative policy director for AARP, called the COLA “a welcome development” in light of the economic downturn and the erosion of people’s retirement savings, but cautioned that it would only go so far.

“As the global markets continue to fluctuate wildly, the retirement savings of millions of Americans are put in jeopardy,” he said. “As the costs of everyday living expenses continue to rise, people living on fixed incomes have been among those hardest hit by the financial crisis. While the COLA is larger than in recent years, so are costs for food, energy and health care.”

An estimated 50 million Americans collect Social Security benefits, including retirees and their dependents, survivors, and people with disabilities and their dependents. Currently, the average monthly payment for retirees is $1,090. In January it will rise to $1,153.

Since 1975, retiree benefits have been adjusted annually to keep pace with inflation. The Social Security COLA is tied to the consumer price index (CPI-W), which represents the cost of a “basket” of consumer goods and services, for the July-September quarter, compared with the same quarter of the previous year.

But there is a lag. Because the COLA is based on the difference between last year’s third quarter and this year’s, recipients are paying more for items before their inflation adjustment actually kicks in.

“They’ve had to pay for higher air-conditioning costs, higher heating oil and gas costs,” Munnell says, “and now the COLA catches up a year later.”

To track inflation’s impact on older Americans in particular, the Bureau of Labor Statistics developed an experimental consumer price index called the CPI-E, which measures the costs of goods and services that people age 62 and older are more likely to rely on, such as health care.

A 25-year study of the CPI-E, released in April, found that older adults on average faced an annual 3.3 percent inflation rate, compared with 3 percent for most other consumers.

Not surprisingly, the cost of medical care was largely to blame. It rose 269 percent from December 1982 through December 2007; inflation for other goods and services during that time was 115 percent.

Monique Morrissey, an economist with the Economic Policy Institute in Washington, called the higher inflation rate for older people very significant.

“Almost every year, they’ve fallen farther behind, and most of the reason for that is health care costs. When Social Security is all you’re living on, it makes a difference.”

Carole Fleck is a senior editor on AARP Bulletin staff.