This article was updated on September 20, 2017 and originally published on April 22, 2017.
Inflation is rising, and while that can strain monthly budgets, it also means that Social Security recipients may get a healthy increase in their Social Security income in 2018. The Social Security Administration (SSA) won't decide on an increase until it compares this year's full third-quarter inflation numbers to last year's third quarter numbers, but based on inflation data so far, recipients could end up getting a 1.7% bump up in their Social Security checks next year.
How does the SSA decide on Social Security increases?
The Social Security Administration determines whether or not to increase Social Security payments based on inflation data from the Bureau of Labor Statistics (BLS).
The BLS tracks the direction of prices for goods and services in the U.S., and while it uses various indexes to do this, the Social Security Administration uses the BLS' monthly consumer price index for urban wage earners and clerical workers (CPI-W) in its calculations.
Specifically, the Social Security Administration averages the monthly CPI-W figures reported by the BLS during the third quarter, and then it compares that average to the monthly average from the last third quarter that resulted in a cost of living adjustment (COLA) increase.
Since CPI-W didn't increase between the third quarter of 2014 and the third quarter of 2015, there wasn't a COLA increase in 2016. Because there wasn't a COLA increase in 2016, but there was an increase in 2015, the Social Security Administration had to compare the third quarter of 2016 CPI-W figures to the third-quarter 2014 CPI-W figures in order to determine whether or not a COLA increase was necessary for 2017. That comparison resulted in a 0.3% increase in Social Security benefits this year.
What's on tap for a COLA in 2018?
Since 1975, Social Security benefits have increased in all but three years, and the average COLA increase has been 3.8%. Since 2005, however, the average COLA increase has been 2.03%, and more recently, increases have been even smaller.
In 2018, the increase may finally become more meaningful. The CPI-W has been increasing steadily this year, and as you can see in the following table, it's higher this quarter than it was in the third quarter of 2016. Averaging the monthly CPI-Ws for July and August and comparing them to last year shows that CPI-W is 1.79% higher in the third quarter this year.
|CPI-W||July||August||September||July/August Average||July/August Change|
If this year-over-year change in CPI-W remains the same through September, then Social Security recipients can expect to see their Social Security income increase by 1.79% in 2018. However, don't start planning how to spend that extra money just yet. Inflation could increase how much recipients pay for Medicare Part B coverage next year and since many Social Security recipients pay their Medicare bill directly from their Social Security income, a lot -- if not all -- of any COLA increase might end up going to Medicare instead of your wallet.