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Why Your 2018 Social Security Check Might Not Grow as Much as You'd Like

By Dan Caplinger - Oct 19, 2017 at 5:03AM

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A hidden cost could eat up much of your cost-of-living adjustment next year.

One of the most important aspects of Social Security is that the income that it provides is adjusted every year to keep up with inflation. Earlier this month, the Social Security Administration released their figures revealing the cost-of-living adjustment for Social Security in 2018. Social Security benefits will go up by 2% next year, but even though that COLA is the largest in several years, many Social Security recipients won't actually see their monthly checks go up by that amount. Instead, a portion of their raise will go toward covering healthcare costs under Medicare.

Why Social Security is giving participants a 2% raise

The SSA figures out how big each year's cost-of-living adjustment will be by looking at data on prices. The CPI-W is one part of the Consumer Price Index that the Bureau of Labor Statistics tracks, and to figure the correct COLA, the SSA looks at the average of the CPI-W numbers for the three months of July, August, and September. It then compares that number to the average of the CPI-Ws for those same three months in the previous year. The percentage difference becomes the COLA that takes effect in January of the following year.

For 2017, the average for the CPI-W during the summer months was 239.668, helped by a substantial increase in September due to rising fuel prices. That was 1.96% higher than the corresponding figure of 235.057 in 2016. The SSA rounded the figure up to the nearest tenth of a percentage point, resulting in the 2% COLA.

The typical retired worker receives $1,371 in monthly benefits from Social Security, according to the latest SSA statistics. That number will rise by more than $27 because of the COLA. However, many Social Security recipients won't actually see that $27 show up in the checks they get.

Social Security cards on a table with a gold key lying on top.

Image source: Getty Images.

Why Medicare could take away your Social Security COLA

The reason why Social Security checks won't go up as much as the 2% COLA would suggest for many recipients has to do with the way that Social Security and Medicare interact. For those who receive Social Security, increases in Medicare premiums in past years have been limited by a little-known law called the hold harmless provision. This provision prevents Social Security recipients from getting smaller Social Security checks when monthly Medicare premiums go up. Typically, Medicare premiums are withheld directly from Social Security checks, so retirees see only the net amount left after paying their healthcare premium costs.

In 2016, there was no cost-of-living adjustment to Social Security, but Medicare premiums were slated to go up substantially. The hold harmless provision kept the cost for those affected at $104.90 per month for Medicare Part B in 2016, even though other Medicare participants paid a much higher $121.80 per month.

That difference got even bigger in 2017. A small 0.3% COLA lifted the average amount that hold harmless recipients paid to $109 per month, but that was still far lower than the $134 per month that those who didn't get hold harmless protection paid.

With the higher COLA in 2018 combined with no anticipated change in the Medicare premium, the typical recipient will see a $25 rise in Medicare premiums each month. That will take out most of the $27 boost from the COLA, and those with monthly checks below the average could see no net increase at all.

Getting back to normal

Still, there's some good news. With the largest COLA since 2012, Social Security and Medicare will be back in sync for most benefit recipients, and that should avoid disparities in gross versus net COLAs in future years. That will allow COLAs in 2019 and beyond to show up fully in most people's Social Security checks. For now, though, many retirees will have to endure one more year of seeing their checks barely budge.

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