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As of July 2016, 60.5 million Americans were receiving Social Security payments each month, including 40.8 million retired workers.
Among those retired workers, based on data straight from the Social Security Administration (SSA), 61% were counting on Social Security to provide at least half of their monthly income. As you might imagine, the figures are a bit higher for elderly single individuals and lower for married couples. Nonetheless, the point is that Social Security is a vital social program that allows a majority of seniors the ability to make ends meet during retirement.
It could be another disappointing year for Social Security beneficiaries
One of the more critical aspects of the program that seniors tend to pay very close attention to is annual cost-of-living adjustments, or COLAs. Social Security's COLA is what allows seniors' benefits to increase in value from one year to the next. A COLA determination is released by the Social Security Administration each October.
Social Security's COLA is calculated using the Consumer Price Index for Urban Wage Workers and Clerical Workers, or CPI-W, which takes into account the cost of various goods and services for tens of millions of American households. The SSA takes the average CPI-W from the third-quarter of the previous year as its baseline figure and compares that figure with the average CPI-W in the third-quarter of the current year (which is why seniors don't find out how much COLA to expect until October each year). Any increase from one year to the next is passed along, in percentage terms, to Social Security beneficiaries beginning in January of the upcoming year. In other words, an increasing COLA yields a "raise" for Social Security beneficiaries. On the flipside, a year-over-year drop in COLA keeps Social Security payouts flat. A drop in COLA does not result in a drop in Social Security benefits.
What's 2017 looking like for seniors? Well, it's once again not a pretty picture if you were hoping for a raise. According to the Board of Trustees' report, an increase of just 0.2% is expected for the upcoming year, which is less than $3 per month based on the $1,350 the average retired worker is being paid monthly by the SSA.
Of course, this figure is still fluid. But in fact, the CPI-W comparisons for July and August between this year and 2014 -- which is the baseline year for measuring any increase because of last year's decline in the index -- average out to an expected 0.25% improvement, which is only a little better than the anemic 0.2% forecast by the Trustees. That increase simply doesn't cut it for many of those reliant on Social Security income.
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Here's why Social Security's COLA isn't expected to move much in 2017
Why are seniors on track to see such a small increase in their benefits in 2017? It all boils down to the weighting of certain expenses as they pertain to the CPI-W.
In August, the Bureau of Labor Statistics released its monthly Consumer Price Index for All Urban Consumers (CPI-U) report. The CPI-U takes into account more households than the CPI-W, but the two inflationary measures are relatively comparable, with a few minor differences. For example, the CPI-U has witnessed a trailing 12-month inflation rate of 1.1%, compared to 0.7% for the CPI-W.
The BLS' August CPI-U report showed that the energy index was down 9.2% from the prior-year period on an unadjusted basis. Similar pricing weakness was observed in food, where prices are flat year-over-year, and apparel, which is has risen by just 0.3% over the trailing 12-month period. The CPI-W tends to put a pretty strong emphasis on transportation and food and beverage costs, which are dragging down the inflationary index that Social Security's COLA is tied to.
Comparatively, however, transportation and food expenses aren't nearly as important for seniors aged 62 and up as a percentage of their total expenditures. According to a different measure, known as the Consumer Price Index for the Elderly, or CPI-E, housing expenditures and medical costs are substantially higher for seniors as a percentage of their total expenditures than they are for the typical urban wage worker, whereas the typical urban wage worker spends more on gas, eating out, and apparel than most seniors. Since the latter has more weight in the CPI-W, seniors are poised to receive much smaller COLA increases than they'd like to get.
Mind you, this expected anemic increase follows COLAs of 0% in 2009, 2010, and 2016.
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What to do
For those of you who've already filed for Social Security benefits, there's not much you can do other than adjust your budget to reflect another year of anemic COLAs. With medical cost inflation handily outpacing Social Security's COLAs, budgetary expenses may need to be cut to ensure that you can make ends meet.
For the remainder of you who haven't filed for benefits yet, let 2017's expected anemic COLA serve as a warning -- you should have alternative sources of income available to supplement your monthly income, and waiting longer to file is seemingly more beneficial than ever. For every year between age 62 and age 70 that you hold off on filing for Social Security benefits, your payment grows by 8%. If you're planning on working longer than expected, or you have secondary sources of income (i.e., retirement plans) that can cover your expense until age 70, then waiting until age 70 to net a monthly payment that's 124% to 132% of your full benefit, depending on your birth year, could be a smart move.
