Social Security is a program that tens of millions of retirees will lean on during their golden years. Of the 62 million people currently receiving a monthly benefit check, 42.6 million are retired workers, 62% of whom count on their check for at least half of their monthly income. What's more, 34% lean on Social Security for between 90% and 100% of their monthly income. Suffice it to say, senior poverty rates would be considerably higher without Social Security. 

Arguably no decision is watched more closely by these tens of millions of retired workers than the mid-October announcement from the Social Security Administration regarding cost-of-living adjustments, or COLA. Think of COLA as the "raise" received from one year to the next that's supposed to be reflective of the inflation that beneficiaries face. Seeing as how most seniors rely heavily on Social Security, this "raise" can play a big role in whether they can make financial ends meet in the months to come.

Today, we'll take a very early peek at what COLA might look like in 2019 for eligible beneficiaries. But first, it might help to better understand how it's calculated.

A Social Security card wedged in between cash bills.

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How Social Security's COLA is determined

The official inflationary tether of the program is the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. It's very similar to the broader Consumer Price Index for All Urban Consumers (CPI-U), and has eight major spending categories that are used to track price inflation for goods and services.

However, it's important to understand that Social Security doesn't factor in a full year of CPI-W data when calculating the "raise" beneficiaries receive from one year to the next. Only CPI-W readings from the third quarter (July through September) are considered, which is why there's no official COLA announcement until inflation data is announced by the Bureau of Labor Statistics in mid-October. This means the average CPI-W reading from the third quarter of the previous year serves as the baseline figure, while the average reading from the third quarter of the current year acts as the comparison. If the average CPI-W reading increases year over year, then the difference in percentage terms, rounded to the nearest 0.1%, is what beneficiaries will receive as an increase in the following year.

In the event that prices decline on a year over year, benefits remain static. A deflationary scenario cannot cause Social Security payouts to be reduced. No COLA has been given because of such an event in three of the past eight years. In 2018, beneficiaries received a 2% COLA, marking the highest increase in six years. 

A senior man counting a fanned stack of cash in his hands.

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An early look at Social Security's 2019 COLA

What might 2019 hold for eligible beneficiaries? Though we don't know with any certainty, because we're still quite a ways away from hitting the months that will actually be used in determining Social Security's COLA, my personal suspicion is that cost-of-living adjustments will be lower than they were in 2018.

Prior to August 2017, it looked as if Social Security recipients were in line for a raise of about 1.5% in 2018 -- then hurricanes Harvey and Irma hit the U.S. in a span of just a few weeks. These hurricanes shuttered offshore drilling platforms in the Gulf of Mexico, shut down refineries throughout the southern U.S., and disrupted fuel flow in many parts of the country. In short, it wreaked havoc on energy prices and pushed gasoline and fuel oil prices through the roof. Energy commodities saw a 7.2% and 9.6% jump, respectively, in price (per the CPI-U) in August and September of last year. This dramatic surge in energy commodity prices is what pushed Social Security's COLA from an estimated 1.5% to the actual 2% that was given to beneficiaries in 2018.

While hurricanes can be an utter disaster for our nation, they historically hit during the months that count for COLA calculation, and they've been known to boost COLA before. Unfortunately, hurricanes are completely unpredictable to forecast, and there's a real possibility we may not see any major U.S. landfalls in 2018. This would suggest that other categories will need to step up and lift the CPI-W.

A hurricane bearing down on Florida.

Image source: Getty Images.

On one hand, shelter costs, which fall under housing, are certainly doing their part to give seniors a raise. Per the CPI-U, shelter prices are up 3.2% on an unadjusted 12-month basis, as of January 2018. However, many other factors aren't showing much in the way of inflation. Medical care inflation has tapered to around 2% as of January 2018, food inflation was just 1.7%, and apparel prices were going the wrong way, down 0.7% on an unadjusted 12-month basis. There aren't any indications that broad-based inflation is picking up. 

In effect, without another significant surge in energy commodity prices, Social Security's COLA could be pedestrian once again in 2019.

The good news is that there's still quite some time to go before a COLA determination can be made, and a lot can happen over just a few months. My suggestion would be to monitor the monthly Consumer Price Index report from the Bureau of Labor Statistics to get a rough feel for inflationary trends. If you simply skim the headline figures, the mid-October COLA announcement from the Social Security Administration shouldn't catch you off guard.

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