I won't keep you in suspense: Social Security checks will be 2.8% bigger in 2019. That's great news for retirees, but there are some important things every Social Security recipient needs to consider about the increase. These include the fact that some retirees might not see the full amount of the increase reflected in their checks, and the cause of the increase could indicate that retirees don't make any real progress toward financial security in spite of the bump-up in income. 

How Social Security determines annual increases

Every year, Social Security's number-crunchers evaluate the annual change in prices for a variety of goods and services using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). An inflation measure, the CPI-W is designed to represent the cost of living for the typical American employee.

A senior woman uses a hoola hoop.

Image source: Getty Images.

Specifically, Social Security compares the CPI-W monthly readings for the third quarter with the third-quarter reading from the last year in which a Social Security increase was awarded. If the CPI-W is higher than it was in that previous period, then Social Security recipients get an increase equal to the percentage change in the index. This is referred to as a cost of living adjustment (COLA). If the CPI-W is lower than it was in the preceding period, then Social Security income remains unchanged from the prior year.

For example, the average CPI-W in the third quarter of 2017 was 2% higher than the CPI-W in the third quarter of 2016 (the last year a COLA was granted), so Social Security recipients got a 2% boost to their income this year.

This year, the CPI-W increased even more. As you can see in the following table, the average reading in Q3 2018 was 2.8% above the average reading in Q3 2017, so Social Security recipients will get a 2.8% increase beginning in January.

Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)
Year Jul Aug Sep Average % YoY Change
2017 238.617 239.448 240.939 239.668  
2018 246.155 246.336 246.565 246.352 2.8%

Data source: Social Security Administration.

Don't get too excited yet

The increase is important because Social Security accounts for over 50% of retirement income for roughly half of all married couples. However, while the 2.8% COLA increase in Social Security is the largest awarded since 2011, it won't add all that much money to the average recipients' annual income.

As of August 2018, Social Security's monthly statistical snapshot shows that the average retired worker is collecting $1,415.94 in monthly payments. This means that typical retirees will see their monthly check climb by only $39.64 and their annual haul increase by $475.76. Don't get me wrong, no one's going to complain about an extra $500 every year. But that's far from a life-changing increase.

There's also Medicare to consider. Many Social Security recipients have their Medicare Part B premium taken directly out of their Social Security payment. Medicare premiums also increase every year, but their increase isn't determined by the CPI-W. Instead, Medicare increases depend on healthcare costs that have, historically, grown far faster than prices for other goods and services, and that means premium increases can cut deeply into annual Social Security COLA benefits.

A senior man shrugging his shoulders.

Image source: Getty Images.

For instance, rising Medicare Part B premiums resulted in over 40% of seniors getting an increase of $5 or less in their Social Security income in 2018, despite a 2% COLA, according to the Senior Citizens League. Because of Medicare premiums, only 7% of respondents saw a monthly COLA increase greater than $25.

In 2019, more people should receive more of their benefit than this year, because this year was significantly impacted by Social Security's hold-harmless provision, a rule that prevents Medicare Part B premiums from increasing by more than Social Security's COLA amount. There wasn't a COLA increase to Social Security in 2016, and in 2017 the COLA increase was tiny. So it wasn't until 2018 that many Social Security recipients could really "catch up" to the current Medicare premium.

Medicare's Part B premium will increase about 1.1% to $135.50 per month in 2019. Therefore, if you're paying less than this amount, your Social Security checks might wind up being smaller than you expect next year. According to Medicare, the hold-harmless rule will still affect 2 million beneficiaries in 2019.

It also shouldn't be lost on Social Security recipients that their COLA increase is based on inflation, which means that it simply reflects how much more they're paying for the same goods and services compared with one year ago. Therefore, recipients aren't coming out ahead in real-dollar terms because of their COLA. Worse, because Social Security's COLA is based on workers, not retirees, it doesn't really reflect the inflation that seniors are facing, particularly because seniors spend so much more on healthcare than their younger, working counterparts. Because of soaring costs unique to the elderly, retirees have seen a 34% decline in their purchasing power since 2000, according to the Senior Citizens League.

Overall, it's good news that Social Security payments will increase by the most in years in 2019, but recipients might not want to get overly excited about it.