Millions of Americans rely on Social Security for their livelihood in retirement, including many who get the lion's share of their income from the program. Even though benefits have generally risen each year due to inflation, Social Security recipients had to put up with no cost-of-living increase in 2016, and many are aching for any boost to their retirement checks that they can get. So far, the news has been bad, with the Trustees of the Social Security Trust Fund projecting just a 0.2% increase for Social Security next year. Yet things could turn out even worse for retirees on Social Security, and it's entirely possible that any increase for 2017 could disappear as well.
How to calculate the 2017 Social Security increase
To determine cost-of-living adjustments, or COLAs for short, the Social Security Administration takes a look at an inflation index to measure changes in prices. Those adjustments take effect every January for retirees and other recipients of Social Security benefits.
However, the numbers for calculating the annual COLA come out before any changes take effect. The SSA uses the Consumer Price Index for urban wage earners, also known as the CPI-W, and takes the average for the three months of July, August, and September. Typically, the average is higher than the corresponding average from the previous year, and when that's the case, the percentage difference becomes the COLA for the following year.
For any potential 2017 COLA boost, there's one complication. Because there was no COLA in 2016, you need to compare this year's figures with the corresponding CPI figures two years ago. The reason is that prices have to catch up to compensate for any deflation that took place last year before it can lead to an upward adjustment in benefits.
Why a zero COLA is still a possibility
Inflation figures lag by about a month, so we won't have July, August, and September numbers until well into the fall. But based on the most recently available figures from May, the current CPI-W figure is 234.444. That figure is higher than the 2014 three-month average of 234.242 by just less than 0.1%. The Trustees Report projection clearly assumed that prices would continue to move higher into the summer months.
However, higher inflation is far from a certainty right now. The huge increases in April and May were largely due to the massive climb in gasoline prices and other energy costs. In particular, the energy index component of the CPI jumped 1.2% in May on a 2.3% rise in gasoline, following much larger rises of 3.4% and 8.1%, respectively, in April. In the past month, however, average gasoline prices have fallen almost 4%, and crude oil has fallen back below the $50 per barrel mark. If energy continues to struggle through the summer months, then their downward impact on the CPI could easily pull the three-month average from July to September down far enough to prevent a cost-of-living increase for Social Security in 2017.
Be prepared for no 2017 Social Security increase
Social Security recipients haven't gotten big increases for a long time. Even before 2016's lack of a COLA, increases from 2013 to 2015 were all below 2%. 2012's positive move was a sizable 3.6% increase, but that followed two years of stagnant benefits in 2010 and 2011.
Of course, some will argue that a lack of inflation should be good news for Social Security recipients. Living on a fixed income means that it's important for prices not to rise too quickly, and deflation can actually help those who can rely on constant monthly income. The problem, though, is that many argue that the CPI-W doesn't accurately reflect how retirees have to spend money. Specifically, energy costs for gasoline aren't necessary as important for those who don't have to commute to work, and higher prices for healthcare and prescription drugs hit retirees harder than younger Americans.
Regardless, a lack of will to make major changes to Social Security makes it unlikely that we'll see changes to the way that COLAs are calculated, at least in the near term. As a result, if the energy markets don't rebound soon, retirees might well have to go two years in a row without a COLA and get used to the idea of waiting until 2018 for a potential boost to their monthly Social Security checks.