The Great Recession is about to squeeze retirees where it hurts: the monthly Social Security check.
By law, Social Security passes along an annual cost of living adjustment -- or COLA -- to recipients. The increase is tied to a broad measure of inflation in the economy, and a year hasn't gone by since Social Security was created in the 1930s without a COLA.
But consumer prices have been flat or falling this year due to the sinking economy. And while the 2010 COLA won't be announced formally until this fall, government forecasts make clear that Social Security recipients shouldn't expect an increase next year -- and probably not for at least two years beyond that.
Amazingly enough, some retirees will even see a decrease in their monthly checks for Medicare premium deductions -- although that won't be the case for most recipients.
The situation might look like a wash at first glance; if consumer prices are down, seniors don't need a raise, right? But retirees are impacted disproportionately by a sub-set of prices that tend to rise more quickly than inflation in the broader economy: health care, energy and transportation. They're also grappling with the bad timing of falling home values and investment losses at a time when many need to tap those assets.
The result is that the vanishing COLA will squeeze many retirees hard. Social Security provides, on average, about 39 percent of income for retired households, according to AARP. More than 50 million people receive benefits.
A general decline in the financial picture of seniors is well underway; a recent survey by the Pew Research Center showed that more than a third of seniors have cut their household spending in the past year; nearly 40 percent said the recession has caused stress in their families; a majority (56 percent) said the recession "probably will make it harder for them to take care of their financial needs in retirement."
But one of the most painful implications of the vanishing COLA comes from the way that Social Security is linked with retiree health care costs. This is related to Medicare premiums and other general out-of-pocket expenses.
Most Social Security recipients choose to have their Medicare Part B premiums deducted from their checks. Part B covers physician and nursing services, tests, vaccinations, and a variety of therapies, and the COLA normally is more than enough to cover any annual increases.
The Part B premium has been rising sharply in recent years. It's currently set for 2009 at $96.40 per month, and will jump to $104.20 in 2010 and $120.20 in 2011.
What will that mean for retirees in 2010, absent a Social Security COLA? The good news is that about 75 percent of Medicare recipients are protected from a net decrease in benefits under the law, according to research by The Henry J. Kaiser Family Foundation. But you're not protected from the increase if you fall into one of several categories.
Learn more about how seniors will be affected at RetirementRevised.com.
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