Is a 3.6% Social Security bump enough?

This post comes from Giselle Smith at MSN Money.

Could you live better on $39 more a month?

That's the average increase predicted for retirees in 2012 thanks to a cost-of-living adjustment announced today by the Social Security Administration. Though happy for the 3.6% increase -- which amounts to an average annual bump of a little less than $500 -- many seniors aren't counting the extra dollars just yet.

The first COLA in Social Security and Supplemental Security Income benefits since 2009 impacts 55 million people getting Social Security, and more than 8 million on SSI, who will receive an average increase of $18 a month.

However, Medicare is expected to announce next week the 2012 cost of Part B premiums -- which cover doctor visits and outpatient services, and are deducted from most beneficiaries' Social Security checks. The predicted increase in premiums could take a bite out of the COLA increase.

Will the net result be enough to make a difference? Many say no.

"My costs this year alone jumped 6%. Somebody is 'cooking the books.' COLA supposed to go hand in hand with inflation," commented one reader on MSNBC.

"This pay increase of $40/mo won't even put me back where I was two years ago," wrote another. Post continues after video.

"Seniors have basically been in a standstill for two full years, and some of that breathing room is going to be wiped out by the fact that premiums are going up," says Cathy Weatherford, CEO of the Insured Retirement Institute, a trade association for providers of annuities, insurance and financial planning, MSNBC reported.  

Many advocates and seniors say the COLA is not enough to offset the rising cost of necessities such as food, utilities, and health care.

"Unfortunately, the increase announced today will not completely ease their burden," said Nancy LeaMond, executive vice president with AARP, according to The Hill. "Medicare premiums are also expected to rise for many. And with the decline in housing values, deep losses to retirement and savings accounts and skyrocketing health and prescription drug costs, millions of older Americans continue to struggle to make ends meet."

Nancy Altman, co-director of Strengthen Social Security, said out-of-pocket health care costs rose 14.1% for seniors and people with disabilities in the past two years, according to The Associated Press.

Many retirees rely on Social Security for the majority -- sometimes as much as 90% -- of their income, according to the Social Security Administration. Retirees also spend their income differently from working taxpayers.

As the AP reported:

"The COLA index is based on average price of goods and services as consumed by workers, not by retired people," says Polina Vlasenko, an American Institute for Economic Research fellow. "Retirees tend to spend more on health care and goods and services, and those prices increase faster than the national average. So COLA may not fully compensate for what that they spend their money on."

Doing the math

The amount of the COLA is determined by a formula specified by the Social Security Act. COLAs are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which are calculated by the Bureau of Labor Statistics. If the CPI-W stays flat, or decreases, there is no COLA, but Social Security and SSI benefits stay the same.

Since COLAs began in 1975, the only years when inflation was too low to warrant an increase have been 2010 and 2011 -- after a 5.8% jump in 2009.

• Bing:Why the big benefit increase in 2009?

Senior advocacy groups, including AARP, argue that the CPI-W is not an appropriate measure of inflation for older adults, because it doesn't reflect the actual costs of goods they purchase, including a much larger portion of income on medical care.

But changing the formula, as some propose to do, could make things worse. CNN reported:

Going forward, Social Security beneficiaries may not see such generous COLA increases. As part of the debt reduction talks, lawmakers are looking at changing the formula upon which the annual increase in based, said David Certner, AARP's legislative policy director. This could lower the COLA increase by several tenths of a percentage point, which may not sound like much but adds up over time, he said.

For 2012, is 3.6% a reasonable increase?

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