Social Security Raise Won’t Go Far for Recipients

While this year’s 1.7 percent cost-of-living increase for Social Security recipients is one of the smallest in history, it still beats the 1.5 percent raise last year, and is a far cry better than 2010 and 2011, when there was no increase at all.

“How dramatic it is in terms of helping one’s financial situation — it’s not a significant amount of money,” said Thomas J. Mackell Jr., former chairman of the Federal Reserve Bank in Richmond, Va., and author of “When the Good Pensions Go Away.”

Robert Hapanowicz, President of Hapanowicz & Associates in Pittsburgh, has his doubts as to whether the increase will do much for recipients.

“The question is, ‘Is the Social Security increase keeping up?’ ” he asked. “Social Security was meant to supplement retirement income. Back when it was started, the average life expectancy was lower. People live longer today.

“So, it’s likely those who rely on Social Security for a substantial part of their retirement income aren’t keeping pace with those who continue to work.”

Social Security and Supplemental Security Income benefits are adjusted annually by the Bureau of Labor Statistics to reflect the increase, if any, in the cost of living as measured by the Consumer Price Index.

While the purpose of the cost-of-living adjustment is to prevent the purchasing power of the benefits from being eroded by inflation, how far recipients stretch those dollars largely depends on their local economy.

For instance, in the Pittsburgh region, where the Consumer Price Index for all urban consumers rose 1.1 percent from the first half of 2013 to the first half of 2014, the increased spending power will go a little further than in San Diego, where prices picked up 1.4 percent during the same time frame.

The pay raise for most of the nearly 64 million Americans who receive benefits will amount to less than $30 a month.

“Depending on their tax situation, the increase could be minuscule. But every little bit helps,” Mackell said.

That increase will be paid for by people who are still working — especially those in the highest tax bracket. According to the Social Security Administration, of the estimated 168 million workers who will pay Social Security taxes in 2015, about 10 million will pay higher taxes.

Wages subject to the Social Security tax rose from $117,000 in 2014 to $118,500 this year, adding another $1,500 that would be subject to taxation.

Hapanowicz suspects more increases are in store for taxpayers as the system struggles to keep up with a growing number of people receiving benefits. “We are likely to see further increases in Social Security taxes and reduction in benefits via older retirement ages,” he said.

Pamela Villarreal, a senior fellow at the National Center for Policy Analysis in Dallas, is surprised that insurance premiums for Part B Medicare will not be going up this year. That is usually what happens when Social Security recipients get a cost-of-living increase.

She said the cost-of-living increase typically is just enough to cover an increase in medical premiums, so it usually has no impact on improving the standard of living. For most seniors, Medicare premiums will remain at $104.90 a month.

“Even without the Medicare-premium increase, the average Social Security recipient is receiving about $1,300 a month, which amounts to about a $22-a-month raise,” Villarreal said. “It won’t have a big impact on seniors. But it beats a sharp stick in the eye.”

Hapanowicz said there are strategies that seniors can use to optimize Social Security benefits. Too many do not carefully consider when and how to take their benefits — and once they elect to receive their benefits, the decision is irrevocable.

For example, one technique he discusses with married couples is to file and suspend. In that case, one of the wage earners applies for benefits, while the spouse applies for spousal benefits. Then, the original filer suspends benefits.

Why?

“Because delaying Social Security benefits results in an 8 percent year-over-year increase in the benefit amount,” he said. “So at full retirement age, the suspended benefits can be reinstated at a much higher level than the original amount, and you have just optimized your Social Security benefit.

“Once you elect, you may be on a path that is not as lucrative compared to wage earners. Suspending is part of optimizing.”

This article appeared in print in the January 14th, 2015 edition of Hamodia.