Millions of Americans are currently dependent on income from their Social Security checks to help them meet their basic needs in retirement. In fact, a 2014 study by the National Academy of Social Insurance showed that two out of every three recipients would have to make substantial sacrifices in their lives without their monthly checks coming in, and many believed they wouldn't be able to afford food, clothing, or housing in retirement.
With so many households heavily dependent on the program, many Social Security receipts want to know if they can expect to see their paychecks increase each year to help them maintain their standard of living. The good news is, the general answer to that question is "yes," as for the most part, payments do tend to tick up each year. However, that's not always the case, and in some years, payments are held flat with the prior year.
That's been the case in recent history, as payments did not move up at all in 2016, which was likely concerning to many recipients. After all, it was the first time in five years their checks didn't get a boost.
Blame it on the COLA
The reason Social Security checks were held steady this year has to do with the way cost-of-living adjustments, or COLA, are calculated. Congress tacked on a COLA provision as an amendment to Social Security in 1972 as a way to help ensure that the purchasing power of Social Security checks wasn't eroded away by inflation. That was a smart move by legislators, as prior to that amendment going into effect, benefits only increased by a special act of Congress.
Under current law, benefits are only adjusted upwards if there's an increase in inflation as determined by the Bureau of Labor Statistics Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. At the end of the third quarter each year, the BLS looks back at 12 months worth of data in order to determine the inflation rate. Since the CPI-W was flat from the third quarter of 2014 to the third quarter of 2015, it was determined that there was no COLA in 2016.
While for the most part, this system works well, it's certainly not without its flaws. One of the biggest arguments against this setup is that the CPI-W may not be the best way to measure inflation as it fails to mimic the actual inflation rate Social Security beneficiaries face. After all, while the overall inflation rate has been low in recent years, healthcare costs have continued to march higher, putting seniors on limited incomes between a rock and a hard place.
What if my Medicare premiums go up?
Many retirees pay their Medicare premiums directly from their social security checks, which could put them in quite a bind if premiums were raised at the same time their Social Security checks stood still. Thankfully, there is a law on the books called the "hold harmless" provision that protects the majority of seniors from taking this double hit. Under this provision, Medicare Part B premiums that are deducted from Social Security checks are held steady.
Will I get a raise next year?
While it's too soon to tell if beneficiaries can expect to receive an increase in 2017, the best plan of action is to plan as if benefits will be held steady for a second year in a row. After all, the CPI-W continues to be remarkably tame, mostly owed to the fact that energy prices have fallen so dramatically over the past 18 months. In fact, the CPI-W readout from February 2016 was only 0.7% higher than the same time in 2015, so overall inflation remains remarkably low, hinting that an increase may not be in the cards.
That's probably bummer news for millions, which is why several presidential candidates are calling for reform in order to raise benefits. However, it's completely unclear right now whether any of their proposals will become the law of the land, so until we know more, retirees should be bracing themselves for another year of sideways payouts.