There's arguably no social program in this country that means more to seniors than Social Security. That could change over time as medical care expenditures outpace wage growth, but for now, Social Security's importance in providing a financial foundation for retired workers is simply unmatched.
According to data from the Social Security Administration (SSA), 62% of seniors rely on their monthly stipend to account for at least half of their income. What's more, 34% lean on Social Security for between 90% and 100% of their monthly income. If this program weren't there, the Center on Budget and Policy Priorities suggests that 22.1 million additional Americans would be living below the poverty line.
This is the biggest raise beneficiaries have seen in six years
Considering how important this program is to seniors, it's no surprise that mid-October is easily the most anticipated time of the year for recipients. This is when the SSA announces its annual changes to the program, many of which are indexed to some inflationary measure.
For example, the maximum monthly payout at full retirement age is increasingly noticeably in 2018. Folks who managed to consistently earn more than the maximum taxable earnings cap for 35 or more years can receive up to $2,788 a month at their full retirement age, up $101 from 2017.
For workers, it pays to know that the maximum taxable earnings cap for the payroll tax rose by $1,200 to $128,400. This means the 12.4% payroll tax applies to all earned income between $0.01 and $128,400 in 2018, up from $0.01 and $127,200 in 2017.
But make no mistake about it: Social Security's cost-of-living adjustment (COLA) is the star of this data release each year. In 2018, according to inflationary data from the Bureau of Labor Statistics, Social Security recipients will receive a 2% COLA -- the highest in six years. The jump in COLA is in response to higher gasoline prices (one of the many categories measures by Social Security's inflationary tether) as a result of hurricanes Harvey and Irma shutting down refining and drilling capacity in the Southern U.S. and throughout the Gulf of Mexico.
With the average retired worker bringing home $1,375.29 a month, it means the average recipient can expect a $27.50 increase in their monthly take-home. Over the course of a year, we're talking about an extra $330.
Don't uncork the champagne just yet
However, even the best COLA in six years isn't enough reason to uncork that bottle of champagne you've been saving. That's because not everyone is going to get an extra 2% in their monthly check come the new year.
In recent years, medical care inflation has been handily outpacing Social Security's COLA growth. This inflation has reared its head via rapidly rising Medicare Part B premiums (Part B covers outpatient services). In order for lawmakers to protect seniors who are enrolled in Social Security and Medicare from having their Social Security benefits devoured by rapidly rising Part B premiums, they opted to implement the "hold harmless" clause. This rule ensures that Part B premiums can't rise at a faster pace than Social Security's COLA. The result has been that grandfathered Medicare and Social Security beneficiaries have been paying below the standard $134 a month Part B rate for some time.
Meanwhile, new enrollees to Medicare, seniors who are enrolled in Medicare but not in Social Security, and seniors choosing to be billed directly by Medicare as opposed to having their premiums automatically deducted from their Social Security benefits check, have paid the brunt of the Part B premium increases in recent years.
But things are changing in 2018. Medicare's standard Part B premium is static at $134 a month, meaning this latter group won't owe any extra in the upcoming year, relative to 2017. However, the roughly 70% of beneficiaries who've been protected by hold harmless will now need to play catch-up. They'll either see some, or all, of their 2% COLA gobbled up by Medicare Part B premiums in 2018.
Don't forget about purchasing power issues, either
Unfortunately, that's still not the end of it. In addition to a majority of seniors being deprived of their full COLA, the reality is that Social Security's inflationary tether is doing a poor job of measuring the true inflation that retired workers are facing.
The Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, is currently what determines Social Security's annual COLA. But as the name implies, it measures the spending habits of working-age Americans. That's sort of an issue with 68.5% of recipients being retired workers ages 62 and up as of Nov. 2017. The CPI-W therefore tends to overemphasize education, apparel, food, entertainment, and transportation expenditures, while discounting housing and medical care expenditures, which is what really accounts for a bulk of seniors' spending.
According to an analysis from The Senior Citizens League, Social Security's purchasing power has been slashed by 30% since 2000 as a result of this discrepancy. Thus, even those folks who stand ready to receive their full 2% COLA in 2018 may not truly come out as winners.
Despite the best COLA in years, expect the cries for reform to pick up in the year that lies ahead.