Though Social Security began making regular payments to retirees 77 years ago, its importance seems to grow with each passing year. Once designed to provide low-income workers with a financial foundation for a few years during retirement, Social Security has transformed into a program that a majority of seniors rely on during their golden years. According to data from the Social Security Administration, some 62% of retired workers lean on Social Security for at least half of their monthly income.
And that's not all. Not only are seniors heavily reliant on Social Security, but they're also receiving a payment for an increasing amount of time. The SSA notes that the average 65-year-old will live another two decades, as better access to medical care and medicine are allowing seniors to live longer than ever.
Social Security's annual COLA announcement is of the utmost importance to seniors
The importance of this program simply can't be overstated enough, which is why Social Security's annual changes, announced in mid-October, are probably the most awaited announcement of the year.
By now you're probably well aware that Social Security's cost-of-living adjustment (COLA) is set to pass along the biggest "raise" that beneficiaries have seen in six years. As announced in October, COLA is rising by 2% in 2018. That may seem modest, but it's a breath of fresh air for some recipients after no COLA in three of the past eight years, and a 0.3% COLA, the smallest increase in history, for 2017.
The primary reason benefits are rising by 2% next year is comes from the impact that hurricanes Harvey and Irma had on U.S. energy production. The shutdown of domestic refineries and drilling platforms in the Gulf of Mexico caused gasoline prices to jump substantially higher during August and September. As one of the many categories that influences the inflationary tether to Social Security's COLA, higher gas prices are the main reason some beneficiaries could see a raise.
Here's who really benefits from Social Security's COLA in 2018
However, not all Social Security recipients are expected to get more in 2018 as a result of hold harmless (a Medicare provision that protects Part B premiums from rising faster than Social Security's COLA). Folks who were enrolled in Medicare in 2017, and who have their Part B premium automatically deducted from their Social Security payout, may have been protected from high Part B premium inflation in recent years as a result of the hold harmless clause. However, with Part B premiums static in 2018, those folks who've been paying less than the standard $134 monthly premium for Part B are going to need to "catch up." This could lead to a majority of folks not seeing a dime of their Social Security raise in 2018.
So who'll actually see more money in 2018?
- Existing Medicare enrollees paying the standard Part B premium: If you're already paying $134 a month for Medicare Part B, then you'll be receiving a full 2% increase to your Social Security benefits next year, assuming you're already enrolled.
- Medicare enrollees who choose to be billed directly: If you're enrolled in Medicare and you choose not to have your Part B premiums automatically deducted from your monthly check, then you're not protected by the hold harmless provision. While that means you've probably been hit with some hefty premium inflation in years' past, you'll be sitting pretty in 2018 and also collecting your full Social Security raise.
- New Medicare enrollees: If you've just turned 65 and are now eligible for Medicare, and you've been receiving a Social Security payment, you'll be paying the standard Part B premium and also be in line to receive the full 2% COLA.
- Social Security beneficiaries not enrolled in Medicare: Folks who've chosen to sign up for Social Security benefits before age 65 -- which accounts for 60% of all enrollees, according to the Center for Retirement Research at Boston College -- and aren't enrolled in Medicare, will receive a full 2% raise in 2018.
- The wealthy: There's a really good chance that those folks who are earning the maximum monthly payout at full retirement age of $2,687 in 2017 are going to see more in the upcoming year. Not only was the maximum monthly payout at full retirement age increased to $2,788 for 2018, but these folks are earning so much each month, relative to the average retired worker at $1,374, that even hold harmless wouldn't stop them from seeing a year-over-year raise.
Keep those expectations tempered
On the other hand, beneficiaries would be wise to keep their excitement tempered, even if they are among those folks above expected to receive a raise in 2018. The reason? The ongoing erosion of Social Security's purchasing power.
According to an analysis by The Senior Citizens League, the purchasing power of Social Security dollars has declined by 30% since 2000 -- and this pattern is unlikely to change. What once purchased $100 worth of goods and services now buys just $70 worth of goods and services.
The issue has to do with the inflationary tether used to calculate COLA: the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W focuses on the spending habits of working-age Americans, meaning it emphasizes transportation, food, education, and apparel expenditures, while giving less focus to housing and medical care, which are considerably higher relative costs for seniors. This leads to an underrepresentation of the annual inflation most seniors face.
Long story short, as long as the CPI-W remains the inflationary tether of Social Security's annual raise, expect retirees to continue getting the short end of the stick come mid-October.