Social Security Beneficiaries Welcome 3.6 Percent COLA

Social Security recipients will get a cost-of-living adjustment of 3.6 percent in 2012, a welcome boost after two years of no increase.

Officials announced the hike Wednesday for some 60 million retirees, beneficiaries with disabilites and their dependents. That means a $43 a month increase for those receiving $1,186 in benefits, the average monthly payout for retired workers.

See also: AARP: Relief for older Americans with 2012 COLA.

Heidi Shierholz, an economist with the nonprofit Economic Policy Institute in Washington, says the 2012 adjustment keeps up with inflation "but represents no improvement in seniors' purchasing power."

The last COLA, at 5.8 percent, took effect in 2009. It was the highest adjustment since 1982. Beneficiaries also got a one-time $250 stimulus payment in 2009.

Despite the increase, which begins in January, beneficiaries may not see much of a difference in their monthly checks because some of that adjustment will be eaten up by increases to Medicare Part B premiums next year.

For most people, premiums for Part B, which covers doctor visits and outpatient services, are deducted from their Social Security payouts. The cost for the standard Part B premium for 2012 is expected to be announced by the end of October.

Dave Huetten, 64, of Palm Springs, Calif., says he's appreciative of the long-awaited COLA for next year. But, says the retired real estate investor, who took early Social Security benefits at age 62, the adjustment "doesn't make up for the years of not having an increase."

"Every little bit helps"

The COLA will put an extra $11 a month in Barbara Green's pocket. The 79-year-old retiree gets a reduced benefit because of her Los Angeles County pension.

"I guess I can buy bread with it," she says. "Every little bit helps."

Social Security COLAs are set annually by comparing the cost of goods and services in the third-quarter consumer price index for urban wage earners (known as CPI-W) with the previous year's third quarter. Since inflation was flat from 2008 to 2010, no COLA was issued in 2010 or 2011.

Social Security recipients will get COLA increase. — Photo by Istockphoto

Advocacy groups, including AARP, argue that the CPI-W isn't an appropriate inflation measure for older adults because it doesn't accurately reflect what they spend money on. For example, retirees tend to spend a disproportionate amount of their income on out-of-pocket health care and prescription drug costs, which continued to rise faster than inflation.

So the price of items that remained flat for working adults — and resulted in a determination of no COLA — didn't help older people much since they spend three times as much of their budgets on medical care as younger people.

At a Senate hearing Tuesday, Sen. Bernie Sanders, I-Vt., called for a new formula to be used that doesn't understate inflation for seniors.

Sanders also blasted a proposal put forth by a group of senators that would use a "chained" CPI to calculate inflation and determine the annual cost-of-living adjustments in federal benefits, including Social Security.

Next: What's a chained CPI? >>