Each year, countless seniors who rely on Social Security eagerly await their cost-of-living adjustment (COLA) in the hopes of getting more money in their pockets to pay the bills. Since 1975, beneficiaries have been eligible for automatic COLAs to help ensure that their benefits keep up with inflation. But in recent years, those COLAs have been notably stingy.
Over the past decade, there were three years in which beneficiaries saw no COLA to boost their monthly payments, and over the past five years, COLAs have averaged just over 1%. It therefore is encouraging to hear that recipients may be looking at a COLA that tops 3% going into 2019. That sort of boost would raise the average current monthly benefit of $1,404 by $42 and increase the maximum monthly benefit of $2,788 for someone filing at full retirement age by $85.
But before we get too excited about that news, let's take a step back and remember that most seniors don't see their COLAs in full -- or at all -- thanks to Social Security's "hold harmless" provision. Though this provision is designed to protect seniors from bearing the financial burden of Medicare increases, it's also the reason why beneficiaries may not notice much of a change in their Social Security payments in the upcoming year.
Will next year's COLA amount to much?
Though Medicare Part A, which covers hospital visits, is free for most enrollees, Part B, which covers doctor visits, diagnostics, and preventive care, comes at a premium. That premium, however, is not set in stone, but has the potential to increase year after year.
Unfortunately, Medicare premium increases have been outpacing Social Security's COLAs, leaving beneficiaries in a would-be tough spot if it weren't for the "hold harmless" provision. The provision basically states that Social Security recipients can't see their benefits go down as a result of Medicare increases. Since many recipients pay for Medicare directly through their benefits, when Part B increases more than a COLA, enrollees are only on the hook for the lesser of the two. This means that if Part B goes up 5% in a given year but Social Security's COLA is only 3%, beneficiaries only will pay 3% more for Medicare.
It's a provision that sounds fair, in theory. The problem, however, is that in recent years, Medicare increases have virtually wiped out beneficiaries' COLAs. Furthermore, seniors may not see much, if any, of 2019's estimated 3% raise if Medicare climbs at an equivalent or higher rate.
But that's not the only reason why a 3% COLA is nothing to write home about. Even if seniors were to collect their Social Security increases in full, those boosts still would do an inadequate job of helping them stay afloat financially. For years, senior household spending has well outpaced Social Security's COLAs, and a big reason why has to do with the way those COLAs are calculated.
In short, COLAs are based on the Consumer Price Index (CPI), which measures urban consumer spending. But the costs that are accounted for in that formula don't actually reflect the expenses that impact seniors the most, like healthcare -- which means the system is flawed from the get-go. Throw in the fact that Medicare increases have the ability to easily wipe out those meager COLAs, and there really is no reason to celebrate the news of a 3% Social Security boost.
So where does this leave seniors going into 2019? Basically in the same place they're in today. While it's too soon to tell exactly what next year's COLA will look like, one thing's for sure: It probably won't do much for those who are banking on it.
Therefore, seniors who get the bulk of their income from Social Security would be wise to work on cutting their living expenses to the extent that they can weave some sort of income-generating activity in their lifestyles, whether it be part-time work or monetizing a hobby. Otherwise, those who are already struggling to pay the bills likely will find themselves stuck in the same position come this time next year.
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