Living4Dividends'  Instablog

Social Security checks increased by 5.8 percent this year, the largest Social Security increase in over 25 years.

Next year is a different story. There will be no cost-of-living increase for Social Security recipients. Beneficiaries are not expected to receive another adjustment until 2012, under current law. Social Security increases are tied to the Consumer Price Index for Urban Workers, which decreased in 2009 due to plummeting prices.

The seniors who will be most impacted by the absence of a Social Security boost are not current beneficiaries, who will continue to get checks for the same amount, but new retirees born in 1947 who first signed up for Social Security this year, according to a new analysis by Andrew Biggs, a resident scholar at the American Enterprise Institute and a former deputy commissioner of the Social Security Administration. This group of people never benefited from the supersized Social Security increase last year and could see their purchasing power eroded by inflation before cost-of-living increases resume in 2012. "Current retirees won't be hurt, but new retirees will have a permanent benefit reduction of around 5 percent," says Biggs. "Folks in the 1947 cohort will tend to receive benefits around 5 percent lower than they would have had the 2008 up and down spike in inflation not occurred."

The inflation hiccup in 2008 will cause newly retired couples receiving a monthly Social Security check of $2,235 to receive $1,340 less in each year of retirement than they would have if the Consumer Price Index had a more steady climb, according to calculations by Biggs. If the pair survives until age 83, the couple will get $25,000 less in lifetime benefits. Americans turning 62 in 2010 will also receive lower lifetime benefits, but their reduction will be around half that of current 62-year-olds.

This financial loss can't be avoided by delaying retirement until after cost-of-living adjustments are currently projected to resume in 2012, Biggs cautions. Inflation adjustments, or the absence of them, are factored into the calculation of your Social Security payment if they occur in the year you turn 62 or later, even if you haven't signed up for benefits yet. "Basically, the inflation adjusted primary insurance amount as of ages 63 and 64 will be the same as it was at 62, since the cost of living adjustments over the next two years will be zero," says Biggs.