Why a historic 6% increase in Social Security benefits may not be enough for seniors

Social Security recipients are slated to receive a six percent cost of living adjustment or COLA in 2022, that thanks to a historic spike in inflation. The benefits increase would be the largest in nearly four decades. But would an increase in monthly benefits actually offset the ravages of inflation? Most likely not and here’s why.

Cost of living adjustments trail increases in the CPI or Consumer Price Index as 2022 benefits are based on the CPI through the 3rd quarter of 2021. That means should inflation continue to surge, which is likely, older Americans would find themselves with less purchasing power despite a benefit increase.

Further eroding any boost in monthly Social Security benefits are Medicare Part B premium increases. CNBC reports that from 2000 to 2020, Social Security benefits had an average annual increase of 2.2%, while Medicare Part B premiums went up by 5.9%. While a ‘hold harmless’ provision in Medicare prohibits Medicare premium hikes from reducing Social Security payouts below their current dollar value, retirees still see an effective benefit reduction thanks to inflation- whether it be moderate or severe. Then there’s the tax bite with up to 85% of Social Security benefits being taxable for individuals earning over $25,000 and couples earning over $32,000 per year.

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So how much would a six-percent Social Security cost of living adjustment help? Before you answer consider this. Year-over-year price increase this September were up 42% for gas, 12% for food, 24% for used vehicles, and 5% for restaurant dining. The bottom line is the cost of living adjustments which are based on the CPI don’t fully offset the full impacts of inflation, especially when coupled with Medicare premium increases.

Older Americans who are renting have few options to boost their cash flow to absorb price hikes outside of returning to work or increasing their employment hours. However, those who own their home could be sitting on a hidden inflation hedge by tapping into their home’s value with a reverse mortgage. Homeowners with no mortgage balance could set up monthly tenure payments or a line of credit that can be tapped as needed. Those who are currently making mortgage payments would immediately see a boost in monthly cash flow by refinancing into a reverse mortgage and thus eliminate their required monthly mortgage loan payments.

Inflation, despite the Federal Reserve’s claims, appears to be far from transitory. Truth be told many older retirees will find themselves squeezed by the insidious and hidden tax of inflation, which unfortunately hurts the poor and middle class the most. The good news is some are unwittingly sitting inside a potential inflation hedge.

Does the topic of inflation come up during your conversation with potential borrowers? Let us know what you’re seeing in the field in the comments below.

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