News came out this past week that Social Security benefits will remain flat for 2016. Social Security recipients have normally been accustomed to seeing some increase in their benefits most years. Because recipients will not have this increase, it may result in the curtailment of some expenditures.
Some might wonder, if this is something Congress and the Administration put in place to limit Social Security spending. This was not the case, as increases in benefits are based on changes in the Consumer Price Index (CPI).
The CPI was actually slightly negative for the past year, but the law does state that benefits will not be reduced, even if prices decline. However, a future increase will have to make up for the decline, before benefits can be increased again.
Many people might seem surprised to hear that the CPI index had a small drop over the past year. This is because most prices are continuing to rise, especially for services. However, there has been a major drop in gasoline prices in the past year, especially outside of California. Because of the large drop in gasoline prices this has caused the overall CPI index to register a slight decline.
For many seniors a drop in gasoline prices is not that significant. This is because some seniors no longer drive, and of those driving many are not putting many miles on their cars. Therefore, for many Social Security recipients their true cost of living did not drop, but in fact increased over the past year.
If the more volatile food and energy components are not considered, core prices increased approximately 2% over the past year.
Core prices are what economists normally consider to be the underlying rate of inflation. The services side of the economy, which includes housing costs increased at a 2.7% rate over the past year, confirming that there is still underlying inflation.
Another aspect for Social Security recipients is Medicare premiums. Most years when Social Security benefits increase, there is also an increase in Medicare premiums.
However, for this upcoming year Medicare premiums will be frozen, since the law states that net Social Security benefits are not to be reduced.
Freezing Medicare benefits for Social Security recipients means that those receiving Medicare, but not Social Security are likely to face large premium increases.
Also, certain high-income people may be subject to a Medicare rate increase
Likewise this impact on Medicare may impact states spending on Medicaid, which could affect low-income individuals.Congress and the Administration are working on a fix to alleviate some of the large potential Medicare rate increases. While approximately 70% Social Security beneficiaries will not see changes in their Medicare premiums, others could see significant increases unless Congress and the President act.
One group that will benefit from the freeze on Social Security benefits will be higher income wage earners. For those currently earning over $118,500 per year, any amount over that point is not subject to payroll taxes for the employee and the employer. This amount typically rises most years, but will remain constant for next year.
In future years there will very likely be increases in Social Security benefits. The significant decline in energy prices we saw over the past year would not be expected to occur again anytime in the near future. The underlying trend for most other goods and services that consumers purchase, is still for modest increases.
There is certainly the possibility at some point in the future there can be another year of no Social Security benefit increase. This occurred in 2010 and 2011, but prior to those years benefits had increased every year since the 1970s.
Periodically there is talk about the long-term health of Social Security. For most current retirees it is highly unlikely that any significant changes will be made to alter one’s benefits.
Possibly affluent people could see some curtailment of benefits or greater taxes in the future, but that is only speculation.
For younger people the longer-term benefits for Social Security are more uncertain. A lot will depend on the future mix of working people versus retirees, as to how much in benefits younger individuals may ultimately receive.
Therefore, it is important that people participate in IRAs and 401k plans to have other money for retirement besides Social Security.
