Social Security's 3.3% Raise Won't Keep Up With Health Care Costs

by Barbara Hagenbaugh
USA TODAY
October 20, 2006

WASHINGTON — Americans collecting Social Security will see their payments rise 3.3% in January, a significant gain but maybe not enough to keep up with seniors' increasing costs.

The government calculates the annual cost-of-living adjustment based on inflation in the overall economy.

But inflation for seniors has been higher than that for the overall population in recent years, in large part because health care costs account for a bigger portion of seniors' expenses. And health care costs have been rising faster than prices overall.

"It's a pretty sizable increase, but it still doesn't measure up" to their cost increases, says Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pa.

The inflation rate for those 62 and older was an average 2.8% in the third quarter over the past 10 years, according to an experimental index calculated by Labor Department analysts that tries to better represent seniors' spending habits. That compares with an average inflation rate of 2.6% in the index used to calculate Social Security payments. The payments are adjusted based on third-quarter data.

The adjustment is "critical" for the 49 million people who collect Social Security, AARP legislative policy director David Certner says.

"It really is the continuing escalation of health care costs ... that is one of the biggest concerns for seniors," he says.

The adjustment in Social Security payments is also important for the economy as a whole, particularly as the U.S. population ages, Zandi says. With consumer spending accounting for more than two-thirds of U.S. economic activity, it's vital that people see their incomes keep up with inflation so that they have money to spend, he says.

With inflation expected to slow next year, the 2007 increase will likely beat inflation by about a percentage point, says Nigel Gault, U.S. research director for Global Insight in Lexington, Mass.

That will help seniors recover some of the losses they saw from 2003-2005 when prices were rising faster than their Social Security payments.

"It's a small plus to consumer spending at a time when most likely overall consumer spending growth will be slowing," Gault says.

Jean Rosier, 80, of Milwaukee says the increase in Social Security is unlikely to fully offset her rising health care costs. But, she says, "I'm grateful for what I do get."

In addition, the government announced an increase in the maximum amount of earnings subject to Social Security taxes. Next year, workers will have to pay Social Security taxes on earnings up to $97,500, vs. $94,200 in 2006.