For better or worse, Social Security is arguably the most important social program in this country. Each and every month, the Social Security Administration (SSA) provides a benefit to more than 62 million people, which includes nearly 43 million retired workers. Of these almost 43 million retirees, more than 3 out of 5 lean on their monthly checks to provide at least half of their monthly incomes. In effect, Social Security has played a key role in keeping elderly poverty rates down. 

The importance of cost-of-living adjustments

Given how extensively retirees lean on Social Security to make ends meet, there's potentially nothing more important to current recipients than the annual cost-of-living adjustment (COLA) announcement in mid-October.

A Social Security card wedged in between cash bills.

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COLA is nothing more than the "raise" that beneficiaries will receive in the upcoming year. It's supposed to be representative of the inflation that Social Security beneficiaries face, but this isn't always the case. In fact, Social Security's inflationary tether that determines COLA is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

As the name implies, it measures the spending habits of urban wage earners and clerical workers, which differ greatly from seniors, who spend far more on medical care and housing as a percentage of total expenditures than working-age Americans. This often results in seniors receiving a COLA that doesn't adequately represent the inflation that they're facing.

An analysis from The Senior Citizens League (TSCL) found that the purchasing power of Social Security dollars has declined by 30% just since the year 2000. What you formerly could buy for $100 in Social Security income back in 2000 now buys about $70 worth of those same goods and services. 

Hold harmless is holding back many seniors in 2018

But this is far from the only worry that a majority of seniors are facing this year. According to a recent survey published by TSCL, half of the more than 1,100 Social Security recipients it questioned received no COLA, or virtually no COLA, in 2018, despite an announced 2% "raise" by the Social Security Administration.

TSCL asked participants in its survey the following question: "Which of the following amounts most closely resembles your monthly Social Security benefit increase this year, AFTER the Social Security Administration's deduction for the Medicare Part B premium increase?"

And the results:

  • Social Security is LESS than I received in 2017 (7%)
  • Social Security benefit is the SAME as I received in 2017 (25%)
  • $0.10-$5.00 (18%)
  • $5.10-$10.00 (23%)
  • $10.10-$25.00 (20%)
  • More than $25 (7%)

How is this possible, you ask? Look no further than the hold harmless provision, which is designed to protect Social Security recipients who are also enrolled in Medicare.

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How hold harmless is coming back to haunt seniors

For those folks who already are receiving Medicare and Social Security benefits and have their monthly Medicare Part B premiums (the insurance for outpatient services) automatically deducted from their monthly Social Security checks, the hold harmless provision protects against rapid increases in Part B premiums. In other words, hold harmless ensures that Part B premiums never rise (on a percentage basis) at a faster pace than Social Security's COLA. If they did, Social Security benefits could otherwise fall year over year.

Should this happen, the provision kicks in, protecting about 70% of Part B enrollees from potentially having more of their Social Security benefit go toward Part B premiums in the following year. This means that the remaining 30% -- which is comprised of people who haven't yet claimed Social Security benefits and prefer to be billed directly for their Part B premiums, are new to Medicare, or are high earners -- bear the full brunt of annual Part B increases.

But something interesting happened this year. After years of rapid Medicare Part B premium increases, they remained flat, at $134 a month, from the previous year. This meant that this smaller group wouldn't see any added costs in 2018. However, it meant the exact opposite for the aforementioned 70% who are being forced to play catch-up on their Part B premiums. With many paying an average of $109 a month following the enactment of hold harmless in 2016 and 2017, some or all of their 2018 COLA (a 2% increase) has gone toward their Medicare Part B premiums. 

According to the Social Security Administration, as of April 2018, the average retired worker was earning $1,411 a month. Assuming 2018's 2% COLA, that should work out to a "more than $25" increase in monthly benefits for the typical retiree. Yet as noted, only 7% of respondents received what would equate to a $300-plus annual raise in 2018.

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Social Security isn't meant to be your primary source of income

Though hold harmless serves a purpose, this data also serves as a great reminder that Social Security was never meant to be leaned on as a primary income source during retirement. The Social Security Administration suggests that workers should expect the program to replace about 40% of their working wages. This means there should be another source of income that's your go-to during retirement, such as a tax-advantaged retirement or investment account.

Being diligent about saving for the future takes on even greater importance for today's working Americans, given that, according to the Social Security Board of Trustees, the program is facing the exhaustion of an estimated $3 trillion in asset reserves by 2034. While this doesn't mean that Social Security is going bankrupt -- Social Security's payroll tax ensures it can't go bankrupt -- it does suggest that the current payout schedule isn't sustainable. By 2034, an across-the-board cut in benefits of up to 23% may be needed to sustain payouts through the year 2091.

Inadequate COLAs, a potential cut to future benefits, and an overreliance on the program by current retirees is a dangerous combination.

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