For better or worse, Social Security is America's most important social program. It's responsible for providing a guaranteed monthly payment to more than 62 million Americans -- 22 million of which are being kept out of poverty by their monthly check -- as well as covering 175 million workers with disability and/or survivors insurance.

With that being said, it's probably no surprise that the biggest event of the year for Social Security recipients occurs in mid-October. Following the release of the Bureau of Labor Statistics' (BLS) September inflation data during the second week of October, the Social Security Administration announces just how much of a "raise" beneficiaries will receive in the upcoming year. The official name for this raise is the "cost-of-living adjustment," or COLA.

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

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Here's how Social Security calculates its annual raise for beneficiaries

Since the Nixon administration passed legislation in 1972 (which began in 1975) to implement an automatic annual COLA for Social Security, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been the program's inflationary tether. The way it works is pretty simple. The average reading from the third quarter of the previous year (that's July through September) serves as the baseline reading, while the average reading from the third quarter of the current year is the comparison. If the average price of the goods and services that the CPI-W measures rises year over year, then beneficiaries get a raise commensurate with the percentage increase, rounded to the nearest 0.1%. If by some chance prices fall from one year to the next (known as deflation), benefits remain the same. They can never decline due to deflation.

In mid-August, the BLS reported data on the CPI-W from July, meaning this was the first of three meaningful figures that will be used to calculate Social Security's COLA in 2019. During July, the CPI-W rose by a healthy 3.2% from the previous year, with energy being the primary upward catalyst. According to a more commonly followed and similar inflationary measure, the Consumer Price Index for All Urban Consumers (CPI-U), gasoline and fuel oil prices rose 25.4% and 34.7%, respectively, on an adjusted 12-month basis.

On Sept. 13, the BLS released its second key data point: August's inflation data. According to the release, the CPI-W rose by 2.9% year over year. Similar to the previous month, energy remained the key driver, with gasoline and fuel oil prices rising 20.3% and 30.9%, respectively, on an adjusted basis over the trailing 12-month period, per the CPI-U. Shelter remained a key inflation driver as well, up 3.4%.

Two Social Security cards lying atop a fanned pile of cash bills.

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A preliminary look at Social Security's 2019 COLA

Of course, the BLS isn't comparing percentages from one year to the next. As noted, it's about comparing the average CPI-W reading from Q3 2017 to the average from Q3 2018. Here's how things shaped up last year:

  • July 2017 CPI-W: 238.617
  • August 2017 CPI-W: 239.448
  • September 2017 CPI-W: 240.939

Adding these figures up then dividing by three yields a third-quarter 2017 average CPI-W of 239.668. This figure becomes our baseline. 

Now, here's what the BLS has reported for two of the important three quarters for 2018:

  • July 2018 CPI-W: 246.155
  • August 2018 CPI-W: 246.336
  • September 2018: CPI-W: Will be released during the second week of October.

The data set is incomplete, which is why most folks are anxiously awaiting the BLS' October release of September's inflation data. But based on the two CPI-W readings we do have, we're looking at an average reading of 246.2455, or 6.5775 points higher than last year. If we take this figure and divide it into the baseline number, we get a percentage increase of 2.74%. When rounded to the nearest 0.1%, this works out to a preliminary "guestimate" of 2.7% COLA for 2019. Again, we're missing a month of data, but this looks to be the best COLA beneficiaries have received in seven years.

What will be particularly interesting about the September data is just how much impact Hurricane Florence will have on the energy sector. Last year, Hurricanes Harvey and Irma greatly disrupted production and refining in the Gulf of Mexico, leading to a substantial hike in energy prices. Though not in the Gulf, it remains to be seen if Florence has similar inflation-inducing effects.

A visibly concerned senior man holding a cup in his right hand with a stack of bills in front of him.

Image source: Getty Images.

Don't get too excited

Unfortunately, the biggest COLA in seven years isn't exactly a reason to cheer. That's because, according to an analysis from The Senior Citizens League, the purchasing power of Social Security benefits for seniors has declined by 34% since the year 2000. The reason? Namely, the CPI-W isn't a very good measure of inflation for the program.

The CPI-W, as its name implies, tracks the spending habits of predominantly working-age urban and clerical workers. Although a small percentage of beneficiaries might fall under the category of "urban or clerical workers," a vast majority of program recipients are retired. And, as you can guess, the spending habits of younger urban and clerical workers are nothing like that of aged beneficiaries, who tend to spend more of their income on housing and medical care. This results in an underrepresentation of these categories, and therefore an inadequate COLA for seniors.

Even with a 2.7% (or higher) COLA in 2019, this isn't going to put seniors ahead. There aren't even any guarantees that 2.7% keeps them on par with the inflation they've experienced in 2018. As long as the CPI-W remains the primary measure of inflation for Social Security, there's a good chance that seniors will continue to see the purchase power of those dollars dwindle.