A reader sent me an email a couple of days ago citing an article from the Baltimore Sun dated May 31, 2011, entitled Social Security: After two-year drought, beneficiaries expected to get a raise — But the increase could be soaked up by insurance premiums. The article started,
After two years without seeing an increase in their Social Security checks, more than 59 million retirees and other beneficiaries can expect a bump up in benefits next year.
The Social Security trustees’ annual report released this month estimates that the cost-of-living adjustment in next year’s checks will be 0.7 percent. The increase, which will be announced in October, could be higher, depending on where prices head in the coming months.
(Bolding is mine.) The third pararaph included a kicker.
Still, experts say, retirees could see all or some of that raise eaten up by higher Medicare premiums.
First of all, my thanks to the reader who brought this to my attention. We are all in a hurry these days. If someone read just these three paragraphs, they would very likely be disappointed or angry. Screwed again! But wait. All the way down in paragraph nine, the article’s author finally reveals a somewhat more accurate description of what may happen with the COLA.
The Social Security trustees projected the cost-of-living adjustment using inflation assumptions from December. Since then, the price of gas has spiked upward and then pulled back. If fuel prices tick up again, beneficiaries could see as much as a 2 percent increase.
That explains a lot. If you look at my first COLA Watch 2012 SSA COLA Watch (February Report) which includes inflation data through January 2011, I came up with a COLA of about 0.5% based on this data. If one stops there, the chances for a meaningful COLA are unlikely. Since then, inflation, as measured by the Bureau of Labor Statistics (BLS) has taken off, primarily due to an increase in fuel prices, as illustrated by the graph below. As of the end of April, the CPI-W had reached a point where the COLA based on that figure was just under 3%.
As you can see from the graph, the average national gasoline price hit its recent peak around May 1st at about $3.98 per gallon. Since then, it has fallen back about $0.20 nationally. If this trend continues, we will probably see a somewhat lower increase in the CPI-W in May and lower still in subsequent months than we have seen since the first of the year. I do not expect gasoline prices to drop much more, as we move into the summer driving season, so the CPI-W should continue to climb, albeit more slowly. I do not think it will actually decrease from where it is now, though this has happened before, most recently when the price of oil collapsed in the second half of 2008. As I keep saying, it is what the average CPI-W is for the period from July through September that counts when determining the amount of the COLA.
What the Baltimore Sun article says about the Medicare Part B premium increasing is true. Check any of my COLA watch articles for details about why this is and how it works.
The next CPI report from the BLS will be released on June 15th. I should have my monthly COLA watch up within a day or two of that release.
The daily AAA Fuel Gauge Report can be accessed at AAA’s Daily Fuel Gauge Report.