Nearly 49 million older Americans can expect one of the largest Cost of Living Adjustments to

Social Security retirement benefits in a quarter century, thanks to rising inflation.

Though the actual COLA is still undetermined, economists say recipients can expect a raise in

2009 that will greatly surpass—and could more than double—this year’s 2.3 percent increase.

Alicia Munnell, director of the Center for Retirement Research at Boston College, predicts the

cost of living adjustment “could well exceed 5 percent.” An increase of 5.5 percent or more

would be the largest since a 7.4 percent jump in 1982, surpassing a 5.4 percent increase in

1981.

The Social Security COLA is tied to the July-September quarter of the Consumer Price Index

(CPI-W), which represents the cost of a basket of consumer goods and services, compared

with the same quarter of the previous year. The Bureau of Labor Statistics says that the

current 12-month change in the CPI-W, from July 2007 to July 2008, is now running at 5.6

percent.

The amount of the adjustment for 2009 is announced in October. Since 1975, retiree benefits

have been adjusted annually to keep pace with inflation.

An estimated 49 million Americans collect Social Security benefits, including about 34 million

retirees and their dependents, 6.5 million survivors, and 9 million people with disabilities and

their dependents. Currently, the average monthly payment for retirees is $1,079.

Although inflation is at a 17-year high, Munnell says Social Security beneficiaries actually fare

better than many others in today’s economic climate because retirement benefits have a built-

in adjustment for inflation; 401(k) plans and many wage packages and pension plans do not.

“This notion that everyone gets a cost of living adjustment is no longer true,” Munnell says.

‘Older people, to the extent that they depend on their Social Security benefits, in some ways

are more protected” against inflation.

But there is a lag. Because the Social Security COLA is based on the difference in cost among

consumer goods from last year’s third quarter to this year’s, recipients are paying more for

items before their benefit actually kicks in for inflation.

“They’ve had to pay for higher air-conditioning costs, higher heating oil and gas costs,”

Munnell says, “and now the COLA catches up a year later.”

Higher Medicare premiums have also taken a considerable bite out of annual Social Security

COLAs. Since Part B and Part D premiums are deducted directly from Social Security checks,

and rising steeply each year, many retirees say they’re barely left with enough of an increase

to pay for rising food and fuel prices.

“The Medicare premium alone has doubled since 2000 … and is almost $100 per month,” says

David Certner, legislative policy director at AARP. “The Social Security COLA over that time

period has only gone up 25 percent. So the health care costs are eating more and more” of

recipients’ income each year.

To track inflation’s impact on older Americans in particular, the Bureau of Labor Statistics

developed an experimental consumer price index called the CPI-E, which measures the costs

of goods and services that people age 62 and older are more likely to rely on, such as health

care.

A 25-year study of the CPI-E, released in April, found that older adults on average faced an

annual 3.3 percent inflation rate compared with 3 percent for most other consumers.

Not surprisingly, medical care was largely to blame. It rose 269 percent from December 1982

through December 2007; inflation for other goods and services rose 115 percent.

“This is not insignificant,” Monique Morrissey, an economist with the Economic Policy Institute

in Washington, says of the higher inflation rate for older people. “Almost every year they’ve

fallen farther behind, and most of the reason for that is health care costs. When Social

Security is all you’re living on, it makes a difference.”