Inflation, contrary to what is reported, must be on the rise; I know this because the box of cereal I buy is shrinking while the price is not. Social Security is going to help retirees buy that box of cereal this year. After not seeing an increase in benefits for several years, Social Security recipients will get a 3.6% raise in benefits starting January 1, 2012. But it is not quite that simple.

The problem lies in the fact that for retirees on Social Security and Medicare, what Social Security gives, Medicare may take away. Sometime in the next month or two Medicare will announce how much the premium will go up for Medicare Part B. Whatever the increase is, it will subtract from the 3.6% raise in Social Security benefits, unless the Medicare premium increase is greater than 3.6%, in which case Social Security does not require recipients to fall backwards in net benefit (this is not true for new enrollees or high-income earners).

With that cost of living increase, those saving for retirement might save a little less. In 2011, the Social Security tax was payable on the first $106,800 of income per person. In 2012, that limit rises to $110,100. This increase will not receive a lot of attention, but it is a tax increase all the same.

The Social Security Administration estimates that the cost of living increase will add $43 per month to the average check, increasing the average monthly benefit to approximately $1,229. For those evaluating retirement right now, this is a good number to keep in mind as you think about how much more you need to save. For most, outside savings will still need to provide a majority of your retirement income.