Social Security provides the majority of income for millions of American retirees, and most of those living on a fixed income rely on annual increases in their Social Security benefits to keep up with the rising costs of what they need.
Yet earlier this month, the Social Security Administration released final numbers that show that the cost-of-living adjustment for Social Security in 2017 will amount to just a 0.3% increase. As if that weren't bad enough, most Social Security recipients won't see any increase at all, because the Medicare premiums withheld from their monthly benefit checks will rise just enough to eat up the entire cost of living adjustment.
Let's take a closer look at how the SSA calculated the 2017 increase and why that won't translate into bigger checks for most retirees.
Something's better than nothing
For months, Social Security recipients have speculated about whether they'd get any increase in their benefits at all in 2017. Most recipients have received the same amount in their checks since Jan. 2015, because no cost-of-living adjustment was made at the beginning of this year.
The SSA determines cost-of-living adjustments by looking at the consumer price index known as CPI-W. It takes the average of the CPI-W for July to September, and then compares it to the previous year's average over the same months. This year, because no inflation adjustment occurred last year, it compared the figures to those from two years ago. This year's average of 235.057 was higher than 2014's 234.242, and doing the math determined the 0.3% increase. Those adjustments will take effect in January for recipients of Social Security benefits.
According to the SSA, the increase amounts to a $5 monthly raise for those receiving the average Social Security check of $1,355 per month in 2016. For the typical couple when both are receiving benefits, this year's $2,254 will rise by $6 to $2,260.
Why many Social Security recipients will see that increase disappear
That puny increase won't make a huge difference for most retirees, but it would at least provide a small psychological benefit. Yet many retirees won't even get the satisfaction of seeing their checks go up, because likely boosts in Medicare premiums will eat up the increase.
Medicare premium hikes are limited by what's known as the hold harmless provision. This provision ensures that those who have their premium payments withheld from their Social Security checks never have to see their check amounts go down as a result of increased Medicare costs. Last year, because there was no cost-of-living adjustment, the roughly 70% of Medicare participants who have premiums withheld from their Social Security benefit checks saw no change to their monthly premium. This caused a potential funding crisis for Medicare that took an act of Congress to fix.
This year, the fact that Social Security is going up slightly will give Medicare a bit more room to maneuver. Yet already, there's a big difference between the $104.90 per month that those who were protected by the hold harmless provision last year have been paying in 2016 and the $121.80 per month that other Medicare participants are paying. Even if there weren't any increase in Medicare's internal costs at all, the $5 to $6 increase in monthly Social Security benefits would close only a portion of that nearly $17 per month gap. Moreover, some experts believe that Medicare's costs will once again rise at a substantial rate, leading to even larger increases in Medicare premiums for those who aren't protected by the hold harmless provision.
Planning for lean times in Social Security benefits
Because of the pent-up cost pressures in the Medicare program, Social Security benefits shouldn't expect to see much relief even when cost-of-living adjustments get bigger in future years. Until the full increases in Medicare costs get passed through to those who've benefited from the hold harmless provision, you shouldn't expect take-home Social Security benefits to go up at all -- not just in 2017 but potentially for several years into the future as well.