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Mark Miller: Remaking Retirement

What Retirees Could Expect in 2022

The unique challenges posed by inflation will be the top story in the year ahead.

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The retirement trends to watch next year can be boiled down to just three figures: 5.9%,14.5%, and 25.0%. Each is tied to the key pocketbook challenge that retirees will be dealing with in 2022: inflation

The economy's fits and starts of recovery from the coronavirus produced some very hot inflation figures in 2021. Many experts still regard the trend as temporary, but it now seems clear that consumer prices will continue to rise sharply at least through part of 2022.

Retirees tend to worry more than working people about inflation--and with good reason. Wage income tends to be adjusted over time to reflect changes in the cost of living, and we're seeing some signs that is happening now. But retirees live on fixed incomes, so it comes as no surprise that surveys of retirees show that the impact of inflation is a top concern.

Where do those three numbers figure in?

  • In October, we learned that the faster pace of inflation translated into a historic 5.9% Social Security cost-of-living adjustment, or COLA, for 2022--the largest since 1982.
  • But the net COLA will be reduced by a whopping 14.55% increase ($21.60) in the standard Medicare Part B premium--the biggest since 2010.
  • And U.S. equities are up about 25% since the pandemic-driven trough in March 2020. Equities are not really an inflation hedge, but gains like that have the potential to at least smooth out what otherwise looks like a bumpy environment for retirees.

The question now, of course, is: How long can that trend continue?

The COLA

Social Security COLAs are determined by an automatic formula tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers. But most retirees receive both Social Security and Medicare benefits, and the Part B premium typically is deducted from Social Security checks. So, the important figure is the net COLA, adjusted by the dollar amount of any increase in the standard Part B premium. That means this year's huge Part B hike impacts COLAs differently, depending on the size of a retiree's Social Security benefit.

For example, if you have a $2,500 monthly Social Security benefit, your net COLA for next year is still 5.0%. But if you have a neighbor with a benefit of $1,500, the net COLA shrinks to 4.5%. And the reduction is absolutely brutal for very low-income beneficiaries; someone with a $600 benefit will receive only a 2.3% net COLA.

Even if you're lucky enough to get a 5% or more net COLA, that will only partly offset the rising prices of food, rental housing, homeownership, home heating oil and natural gas, and prescription drugs. All are areas of worry next year.

What's more, this COLA math isn't relevant for all Medicare beneficiaries. Some people just pay the Part B increase, full stop. This group includes people delaying their Social Security claim to boost monthly benefits, new beneficiaries, and anyone subject to Medicare's income-related monthly adjusted amounts. Those also jump 14.5% next year.

A final note on the COLA: If you are eligible for Social Security but have not yet claimed, you'll still receive this year's big COLA down the road, plus any subsequent COLAs awarded before you claim.

Inside the Huge Part B Increase

In part, the huge Part B hike stems from rising prices and utilization of healthcare. But two unique factors also played contributing roles.

Last year, Medicare increased the Part B premium for 2021 by just $3.90, to $148.50 per month. The increase actually was on track to be larger, but as part of a COVID-19 relief bill, Congress stepped in to cap it at 25% of whatever it would have been if Medicare had followed the usual formula. So, the 2022 premium plays catch-up on the foregone increase for 2021.

A second important driver of the 2022 premium increase is Aduhelm, the controversial drug approved by the U.S. Food and Drug Administration in June for the treatment of Alzheimer's disease. The FDA approved the drug, developed by Biogen (BIIB), despite objections from its own scientific advisory panel, which voted nearly unanimously that clinical trials did not demonstrate its effectiveness.

Medicare typically covers FDA-approved drugs, but this one comes with an eye-popping price tag set by its maker--$56,000 per patient annually. That figure is about 10 times more than the drug's estimated value, according to one independent expert review--and it doesn't include other associated care that could add tens of thousands of dollars of additional costs.

Aduhelm will be administered by healthcare providers, and thus will be covered under Part B, rather than the Part D prescription drug program.

Medicare says it needs to build a "contingency reserve" against the possible costs incurred by Aduhelm. But Medicare is still conducting a review to determine whether it will cover Aduhelm, which already is on the market. And in the meantime, few doctors are prescribing the drug, and commercial insurers are resisting covering it.

The results of Medicare's review are not expected until early next year, but even if Aduhelm is rejected--which would be unusual--the next steps are not clear, says Tricia Neuman, director of the Medicare policy program at the Kaiser Family Foundation.

"At that point, the Part B premium is baked in for the year, and it would be difficult to unwind," she says. "That would probably require an act of Congress. An adjustment is conceivable, but it also would be operationally difficult for the Social Security Administration."

The Aduhelm mess could turn up the heat in Washington to curb prescription drug costs and to expand help with drug costs for lower-income seniors, Neuman thinks. "What's going to happen when the next expensive new drug comes to the market?" she asks.

At this writing, negotiations in Congress over President Joe Biden's Build Back Better bill would limit Medicare patients' out-of-pocket drug costs to $2,000 per year, starting in 2024. It also would restrict annual drug price hikes and open the door a bit to allow Medicare to negotiate drug prices with pharmaceutical companies.

Will Portfolio Gains Offset Inflation?

Stocks often are mentioned as a way to keep up with inflation - and for keeping equity allocations a bit higher in retirement to hedge against longevity risk. Equities really aren't an inflation hedge, though, since returns are not correlated with inflation. That said, equities may outrun inflation over time, depending on when they are sold. And the strong returns of the past decade certainly bolster those arguments.

But how much longer can the stock-market party last?

"Our expectation is that intermediate-term returns will be lower than those seen in recent periods--and in some areas of the capital markets, returns might be considerably lower," said Wyatt Lee, head of target-date strategies at T. Rowe Price, during a recent 2022 outlook briefing for reporters. Government COVID-19 stimulus and progress with vaccinations have buoyed the economy and the markets, he noted. But the current high market valuations give him pause.

"Given that we're at valuations we really haven't seen on a forward-looking basis since the tech bubble, we expect the returns in many markets such as the United States will be relatively restrained," he noted.

Add that to the negative real return on risk-free bonds, and the opportunities to offset inflation with strong gains next year could be limited.

Accountability on Last Year's Retirement Outlook

Your columnist is a believer in journalistic accountability. So, how did my predictions for the 2021 retirement landscape hold up?

Medicare solvency: I was certain that Congress would take steps to avert the looming insolvency in 2026 of the Part A trust fund, which pays for hospital care. At the point of insolvency, the fund would have sufficient resources to meet only 90% of its obligations, but no fix appeared this year. In the past, legislative fixes often have relied on reductions in payment rates to healthcare providers or by increasing payroll tax rates.

Health insurance expansion: I gave medium to low odds to President Biden's proposal to add a public option to the Affordable Care Act and drop the Medicare eligibility age to 60. Unfortunately, I was correct on that one--both are good ideas that are going nowhere right now. A plan to expand Medicare by adding standard benefits covering dental, vision, and hearing care has been chopped back in the Build Back Better bill to cover just hearing care, as of this writing.

Social Security solvency and expansion: I also was correct in predicting that Congress would fail to fix Social Security's solvency problem or to expand benefits. You might call this a cheap win on my part, since Congress always seems to kick the can down the road on this issue. The Social Security trustees now project that the reserves of the combined Social Security retirement and disability trust funds will be depleted in 2034. The closer this date gets, odds rise that the fix will involve new revenue and not benefit cuts. Tick, tock.

Multiemployer pensions: Congress did implement a rescue for more than one million workers who faced the risk that their retirement benefits could be slashed owing to a meltdown of multiemployer pension funds. I called this one correctly, but the solution was a surprise: The American Rescue Plan Act signed into law in March allocated $86 billion for grants to struggling pension funds, allowing them to continue paying full benefits. That was more generous than the low-interest loans that Democrats had favored, or the Republican solution, which called for higher insurance premiums and more-conservative accounting assumptions.

Long-term care reform: The horrific death rates from COVID-19 in nursing homes led to calls for reforms in the industry and how we pay for long-term care in institutional and home settings. I didn't think action would come--and it didn't, although the current draft of the Build Back Better bill does include a boost in Medicaid funding for home-based care.

Retirement saving: I thought that creation of a national automatic IRA and revisiting the fiduciary requirements on advice given on rollovers from workplace plans to IRAs would be in the cards. Nothing happened.

By my count, two thirds of my crystal ball predictions were accurate--not so bad in our current unpredictable, volatile climate.

Now, onward to 2022.

Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to The New York Times and WealthManagement.com. He publishes a weekly newsletter on news and trends in the field at RetirementRevised. The views expressed in this column do not necessarily reflect the views of Morningstar.

Mark Miller does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.