On October 13, the Social Security Administration (SSA) announced a 1.3% increase in Social Security and Supplemental Security Income (SSI) for nearly 70 million Americans.
The cost of living adjustment (COLA) will begin with benefits payable in January 2021 for Social Security beneficiaries and on December 31, 2020 for SSI beneficiaries. The 2020 VA Disability COLA will also increase 1.3%.
This increase is tied to the Consumer Price Index (CPI) as determined by the Bureau of Labor Statistics. The purpose of the COLA is to ensure that the purchasing power of Social Security and SSI benefits keeps up with inflation. It is based on the percentage increase in the CPI for Urban Wage Earners and Clerical Workers (CPI-W) from the 3rd quarter compared to the previous 3rd quarter. If there is no increase, there can be no COLA.
Changes to Medicare for 2021 have not yet been announced but is expected to be released in early November. It is still uncertain what the standard premium will be for 2021 due to the economic upheaval, but any increase will be capped at 25% of what it otherwise would be for 2021 due to a short-term funding bill passed by the Senate and signed by President Trump.
The following is a recent question posed by a Compliance Coach customer.
Correctly Factoring in the
Social Security COLA Increase for 2021
QUESTION: I understand the 2021 COLA has been announced and that we must factor it in on any tenants recertifying on or after its effective date. But why is the calculation so complicated?? My supervisor wants me to determine the base benefit amount for 2020 (meaning subtract the Medicare amount from the gross) and then multiply that figure by the COLA increase and then add in the new Medicare amount. That seems like so much work. Why don’t I just take the gross 2020 benefit and multiple the entire amount by the COLA figure? I really don’t think my supervisor is correct on this. Please help.
ANSWER: Excellent question and one I get asked each year the COLA is announced. First, let me set the record straight… your supervisor is NOT wrong. The reason this is correct is because the Social Security benefit and Medicare are administered by 2 different governmental entities – Social Security by the Social Security Administration and Medicare by the Centers for Medicare & Medicaid Services (CMS) which is a division of the Department of Health & Human Services – and each base their increase calculations on different factors.
- Social Security COLAs are a percentage increase (if an increase is applicable that year) based on the Consumer Price Index (CPI) ensuring the purchasing power of the benefit keeps up with inflation.
- Conversely, the Medicare premium is a flat figure based on modified adjusted gross income reported on the recipient’s last 2 years of tax returns.
Simply multiplying the sum of these 2 items by the upcoming year’s COLA increase is an oversimplification of what is actually occurring and likely to result in an inaccurate figure which may cause noncompliance or an inaccurate calculation in rent.
Steps for Applying COLA Increase
The first thing you must do is determine the number of months the recipient will receive 2020 benefits and the number of months the recipient will receive 2021 benefits. So for example, if the household is going to move in on December 1, 2020, you will count 1 month of 2020 Gross Social Security benefits and 11 months of the 2021 Gross Social Security benefits.
To do this, take the following steps:
- Step #1: Determine the 2020 Gross Social Security Benefit
2020 Gross Social Security = 2020 Social Security Net Benefit + 2020 Medicare - Step #2: Determine the 2021 Gross Social Security Benefit
2021 Gross Social Security = (2020 Social Security Net Benefit x 1.3%)* + 2021 Medicare Premium**
* Drop change before adding Medicare premium
** 2021 Medicare Premium not yet released so must use 2020 premium until it is
- Step #3: Annualize the Gross Social Security Benefits
Annualized Gross Social Security Benefits = (2020 Gross Social Security Benefit x 1 month) + (2021 Gross Social Security Benefit** x 11 months)
** Remember until 2021 Medicare Premium announced, must use the 2020 premium
but update equation when 2021 figure released