Americans rely on the retirement benefits that Social Security pays, and one of the most important aspects of Social Security is that it automatically increases the size of monthly checks every year to keep up with inflation. Yet in recent years, Social Security's increases have been very small, and that has left some retirees struggling to make ends meet.
There might be good news for those retirees in 2018. Early signs suggested months ago that there might be a bigger cost-of-living adjustment (COLA) for Social Security than we've seen in several years. Now, the picture is getting clearer, and news that was just released gave Social Security recipients two of the three puzzle pieces they need to come up with a final answer to how much their increase in monthly checks will be in the new year.
What the Labor Department just told Social Security recipients
The Bureau of Labor Statistics is responsible for releasing monthly data on inflation, and the latest release of the Consumer Price Index (CPI) for August dramatically increased the chances of a sizable increase in Social Security benefits come January. The headline CPI number showed a 0.4% rise in prices after seasonal adjustment, with rising prices for gasoline and shelter accounting for most of the gains in the figure.
Social Security uses a slightly different index for calculating its annual cost-of-living adjustments. Rather than the CPI for urban consumers, also known as CPI-U, Social Security measures its inflation adjustments against the CPI-W index for urban wage earners and clerical workers. This index also moved higher by between 0.3% and 0.4%, recovering from a decline in July.
Why the new CPI number points to higher COLAs
The numbers that Social Security uses to calculate the cost-of-living adjustment for benefits come from CPI-W readings throughout the summer months. The Social Security Administration takes the average of the inflation-index figures from July, August, and September and then compares them to the corresponding average from the year-earlier period. The percentage difference becomes the cost-of-living adjustment for the subsequent year.
With two of the three monthly readings for 2017 in the books, we can get a decent idea of what the final figure is likely going to look like. Right now, the two-month average of 239.033 compares favorably against last year's three-month average of 235.057. The difference amounts to 1.7%, which is quite a bit better than the 0.3% COLA at the beginning of 2017, let alone the lack of an adjustment at all during 2016.
Moreover, the big rise in August could lead to an even greater adjustment if price levels remain high. Even if the September reading is unchanged from August, the rise in the three-month average would potentially add another tenth of a percent to the COLA. A similar rise to what we saw in August could push the cost of living adjustment even closer toward the 2% mark.
Should retirees want a big raise?
The problem with inflation adjustments is that they reflect higher costs of inflation. Yet for years, retirees have argued that the CPI-W doesn't really reflect the expenses that they owe. Proposals for alternative measures of inflation that take better account of retiree costs haven't led to any new legislation, but some believe they would align COLAs and costs more effectively.
In the meantime, Social Security recipients can reasonably expect, with substantial certainty, that their 2018 Social Security increase will be somewhere between 1.5% and 2%. With the typical Social Security check averaging about $1,300, that $20 to $25 increase won't be enough to have a major celebration, but it would finally get a bit more money into retirees' pockets at a time when they badly need as many financial resources as they can get.
The Motley Fool has a disclosure policy.