The unintended consequences of a potential increase in Social Security | personal financing

(Stephon Walters)

social Security It can provide a significant supplemental income in retirement for some, but it is the primary source for many others. Among its beneficiaries, 12% of men and 15% of women depend on it for more than 90% of their income.

It is therefore important to ensure that the purchasing power of someone’s benefits does not diminish due to inflation. During normal times, this is about 2% per year; Otherwise, the inflation rate could be 8.5% as of July.

To help with this, Social Security has cost of living (Cola). It increases monthly benefits based on the increase in the Consumer Price Index for urban wage earners and clerical workers (CPI-W) from the third quarter of the previous year. So, the COLA agreement in 2023 will be based on the increase in the third quarter of 2022 CPI-W.

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With inflation levels not seen in several decades, 2023 COLA is expected to be the largest since 1981.

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2023 COLA is expected to be huge

We won’t know exactly COLA until October, but it’s safe to assume it won’t be less than 8%. From a perspective perspective, in the past 20 years, the only times the natural growth rate of infections has exceeded 4% were in 2009 during the Great Recession (5.8%), and this year as we weather the peak of the epidemic (5.9%).

If we go the conservative route and assume an 8% increase, the average monthly Social Security retirement check will go from $1,669 to $1,802. The maximum benefit for people claiming early age 62 is $2,553, the maximum at full retirement age will be $3,612, and the maximum delay until 70 will be $4,529.

And while any increase helps, especially for someone who primarily relies on Social Security, it unfortunately can have some unintended negative consequences.

It may disqualify you from other programs

Tens of millions of people depend on low-income assistance programs across the country. Be it Supplemental Nutritional Assistance Program (SNAP); Women, Infants and Children (WIC) Program; Medicaid or Head Start serves the vital needs of the most vulnerable.

But these programs are designed to help low-income individuals, so there are income limits for eligibility. For example, in California, the largest income a family of two can earn to qualify for Medi-Cal (its Medicaid program) is $25,268.

With a significant COLA increase, some people may become ineligible for certain services or enter a phase-out area where benefits will be reduced. It’s a double whammy: COLA itself likely won’t be enough to explain the damage to bank accounts from inflation, and an increase in monthly interest may cut off access to other programs.

Consider a situation where you start getting Social Security benefits early, at 62. Because you’re not eligible for Medicare until age 65, you may rely on Medicaid to fill those gap years. If a COLA increase somehow pushes you past the eligibility limit (which varies by state), it could leave you with a gap in health insurance coverage during a time when you’re likely to need it most.

A COLA increase is by no means inherently bad, but it’s important to see the full picture so we can start fixing situations like this, whatever that may be.

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