A Call and a Challenge

Last month I received a telephone call from a very nice lady who wanted to know if my package had been delivered. I responded yes, it had arrived. But then after listening to her voice (and on a whim) I asked her if she was retired.

She replied “Oh I have been retired for some time”.

Her friendly nature was unmistakable. So I took a chance on being nosey and asked:

“Do you supplement your Social Security income by doing telephone work?”

“Why yes,” she said “for several years.”

What followed was a very gracious and pleasant conversation. She was happy to talk with me (There are still some very nice people in America - thank heavens). She was working about 20 hours a week and the money she made was a welcome addition to her finances. Bless her heart for her positive attitude and lovely nature.

After I put the telephone back into its cradle, a cascade of questions flooded through my mind.  They all resolved down to two issues: What is the financial situation for people in our age group? And, are Social Security benefits keeping up with the rate of inflation?

Three weeks of hard work later, here is what I found about our Social Security income.

Introduction

Like most of us in our age group, we recently received a notice from the Social Security Administration with good news: “Your Social Security benefits will increase 2% in 2018 because of the rise in the cost of living.” It was, however, accompanied by some not so good news: “The standard Medicare Part B premium for medical insurance in 2018 is $134.00.” That’s an expense increase of more than 21 percent over 2017.

Social Security is a crucial source of income for retired Americans. Here are the statistics (figures in millions):

Age at end of 2017         Population         % Covered         Covered by SS

              65 - 69                 17,073                   90%                  15,366

              70 - 74                 13,209                   88%                  11,624

              75+                      21,427                   82%                  17,570                                                      

                                           51,709                                             44,560

                                                                                                        86.2%

At the end of 2017 44,560 million Americans were covered by some form of Social Security and by the end of 2018, this number will increase to over 45 million retired persons. Of these:

Number of people receiving more than 90% of their income from Social Security

              Married Couples - 23%
              Single people - 43%

Number of people receiving more than 50% of their income from Social Security

              Married Couples - 50%
              Single people - 71%

For beneficiaries, Social Security means financial security. But it would appear the annual increase in Social Security benefits does not track well with the annual rate of inflation.

To prove this point, let’s look Social Security benefits and Medicare expenses from 2013 through 2017. We will assume these sums are being paid to two people who have pooled their financial resources. For people in our generation - typically a married couple. We will also add estimated benefits and expenses for 2018. We want to know how much money we have to spend - called Spendable Net Income. To find this sum we start with Gross Income, subtract the expense of Medicare medical insurance, the Medicare prescription drug plan (if we have one), voluntary Federal Taxes due (If any), and any other deductions the Social Security Administration (SSA) makes. To simplify our analysis, we will only consider annual average Gross Income benefits less annual Medicare expense for these two people.

Median Social Security benefits for our couple increased from ~ $28,566 in 2013 to ~ $30,167 in 2018, or 5.6%.  That means: in 2018, half of all beneficiaries will have a gross income of less than $30,167, and half of all beneficiaries will have an income of more than $30,167.

Average Social Security benefits for our hypothetical couple increased from ~ $31,108 in 2013 to ~ $32,852 in 2018, also 5.6%. Average Social Security benefits are more than median social security benefits because the beneficiary universe skews toward workers who had higher incomes while working.

Medicare expense increased for our couple from $2,518 in 2013 to $3,216 in 2018, or 27.7%.

If we take our annual benefits (Gross Income) and deduct Medicare, we get Net Spendable Income (NSI). This is the money we actually have to buy groceries, pay the rent, and so on. From 2013 through 2018, Median NSI increased by 3.5%, and Average NSI increased by 3.7%.

Inflation Versus Benefits

When we hear about the rate of inflation on TV or on the radio, the numbers are usually quoted from CPI-U; CONSUMER PRICE INDEX FOR ALL URBAN CONSUMERS (CPI-U). This is the measure of inflation normally used for statistical analysis.  But the SSA prefers to use a different measure of inflation called CPI-W; CONSUMER PRICE INDEX FOR URBAN WAGE EARNERS AND CLERICAL WORKERS (CPI-W). As a result there is a slight decrease in the rate of inflation used to calculate our Social Security benefits.

Benefit increases always lag by a year because (in theory) last year’s third quarter year to year rate of inflation from the third quarter of the prior year is used to determine benefits for this year.

Annual benefit increases used for this analysis were derived from the annual benefit announcement provided by the SSA:

              2013      2014      2015      2016      2017      2018

              1.70%   1.50%   1.70%   0.00%   0.30%   2.00%

These adjustments made by the SSA increased the Gross Income of our couple by 5.6% from 2013 through 2018. However the minimum increase of inflation as measured by CPI-W from 2013 through 2018 will likely be 6.6%, and could be more than 8.0% as measured by CPI-U. Net Spendable Income (the money we actually get to spend) lags far behind at 3.7%.

What About the Last Ten Years?

If we perform a similar analysis for the years 2007 through 2018, the results are more favorable to us. The total annual increase in Gross Social Security income is very close to total annual inflation as measured by CPI-W. Like our five year analysis, however, the timing increases in Gross Income are woefully out of synchronization with annual increases in the rate of inflation. The increase in 2009 obviously deviated from established policy, as does the zero increase for 2011.

Conclusions

1. The average rate of inflation as measured by CPI-W will exceed the total increase in Social Security benefits from 2013 through 2018.

2. Because of the increase in the Medicare deduction, Net Spendable Income for our hypothetical couple from 2013 through 2018 will only increase by ~ 3.7%.

3. The annual average increase in benefits does not track well with the annual rate of inflation as measured by CPI-W or CPI-U.

4. Benefits increases will exceed the rate of inflation only if America enters an extended period of deflation and Congress does not change the law.

And so. That nice lady has found a solution to her financial problem and thankfully - it is one she really enjoys.

What’s your experience?  Leave a comment.

A Caveat

BLS and SSA data are a bit murky and require some interpretation.

Although I have pursued an avocational interest in Cultural Economics since 1969, age has at last caught up with me. I am no longer infallible.

A complete copy of this essay with charts may be found on my blog at http://summa21.blogspot.com/2018/02/social-security-do-benefits-lag.html

Feel free to make a copy for yourself and send it to your friends.                          

TCE

References

Note 1:   Source of statistics: Social Security Administration, Master Beneficiary Record and Supplemental Security Record, 100 percent data.                                              

Note 2:   Basis of Increased Benefits   (From SSA text).

“Since 1975, Social Security's general benefit increases have been based on increases in the cost of living, as measured by the Consumer Price Index. We call such increases Cost-Of-Living Adjustments, or COLAs.

Cost-of-living adjustments (COLAs) are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is determined and published by the Bureau of Labor Statistics, Department of Labor.

Is the CPI a cost-of-living index?

The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. ... while we publish many indexes, our broadest measure of inflation includes all items consumers purchase, including food and energy.

Does the CPI measure my experience with price change?

Not necessarily. It is important to understand that BLS bases the market baskets and pricing procedures for the CPI-U and CPI-W populations on the experience of the relevant average household, not of any specific family or individual. It is unlikely that your experience will correspond precisely with either the national indexes or the indexes for specific cities or regions."

“The COLA increase is based on the percentage increase (if any) in the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter of the current year over the average for the third quarter of the previous year.”

Note 3:   About Medicare

Some people who collect Social Security benefits and have their Part B premiums deducted from their payment will pay less. This is because their Part B premium (cost) increased more than the cost-of-living increase for 2018 Social Security benefits. Social Security will send a letter to all people who collect Social Security benefits (and those who pay higher premiums because of their income) that states each person’s exact Part B premium amount for 2018.

Since 2007, higher-income beneficiaries have paid a larger percentage of their Medicare Part B premium than most. Depending on their income, these higher-income beneficiaries will pay premiums that amount to 35, 50, 65, or 80 percent of the total cost of coverage. You can get details at Medicare.gov or by calling 1-800-MEDICARE (1-800-633-4227) (TTY 1-877-486-2048).

Note 4: Factoids

Because of the influx of “Baby Boomer “ retirees, Social security costs will increase from roughly 4 percent of GDP in 2005 to 6 percent of projected GDP in 2035. The projected percentage of the American population age 65 or older will increase from roughly 12.5 % to 21 %.

President Trump’s budget proposes to preserve Medicare and Social Security benefits, but cut Social Security Disability benefits.