Last week, my colleague and personal finance expert Dan Caplinger reported that Social Security recipients likely will have something to celebrate come 2019. By his analysis, seniors who collect benefits are looking at anywhere from a 2.5% to 3% boost in their monthly payments. That's an improvement over the 2% increase seniors saw going into 2018 and a marked change from the virtually non-existent increases that plagued seniors for two years prior.
Still, seniors anticipating next year's increase should be cautiously optimistic about its actual impact on their day-to-day lifestyles -- because chances are, it won't have a significant one.
The problem with COLAs
Those who collect Social Security are no doubt familiar with the program's annual cost-of-living adjustments, or COLAs. Automatic COLAs were implemented back in the mid-1970s to help seniors dependent on Social Security retain a reasonable degree of purchasing power in the face of inflation. The problem, however, is that COLAs have not only been stingy in recent years, but do a poor job, in general, of helping seniors keep up with their expenses.
Part of the problem stems from the way COLAs are determined. At present, they're based on the Consumer Price Index (CPI) for urban consumers -- folks whose expenses don't actually reflect the costs most seniors face. Case in point: The CPI is heavily based on housing data, whereas medical care makes up a much smaller percentage. But seniors tend to spend a huge chunk of their earnings on healthcare, so there's a clear mismatch. In fact, the Senior Citizens League estimates that Social Security recipients have lost as much as 34% of their purchasing power since 2000, despite the fact that there have been some pretty generous COLAs interspersed throughout.
And that's exactly why seniors shouldn't be too quick to bank on next year's COLA, substantial as it might be. At present, the current average recipient collects 1,404 a month in benefits. If we want to think positively and assume that 2019's COLA will hit the high end of the aforementioned range (3%), that translates into a $42 monthly raise.
Granted, an extra $504 per year is better than no income boost at all. But given that sort of sum could easily get swallowed up by a single medical bill, it's not exactly the windfall some folks might make it out to be.
A smarter way to get ahead financially in retirement
If you're a senior who relies on Social Security for the bulk of your income, you're in a pretty precarious place to begin with. That's because those benefits were never designed to sustain retirees on their own. If you were an average earner during your career, they'll replace about 40% of your pre-retirement income, but most seniors need close to double that amount to live comfortably.
Therefore, if you're heavily dependent on Social Security, rather than look to next year's COLA to make a difference in your financial picture, take steps to alter your spending habits. If you're currently paying for luxuries you can do without, cut back. If your home is costing you a ton of money to maintain, downsize to a smaller space.
You also might consider getting a part-time job to generate more regular income. Imagine you're able to earn $100 a week by doing a relatively painless job, all the while keeping the bulk of your waking hours free. By year's end, you'll be sitting on $5,200, which is about 10 times the boost you'll get from Social Security over the course of 2019, assuming that 3% COLA comes to be and you collect an average benefit.
Is a 2.5% to 3% COLA something to be happy about? Sure. Is it something that will change your life? Probably not.
If you really want to buy yourself a more comfortable, financially secure existence in retirement, make changes to your personal budget and boost your income by working a bit. Remember, we don't know what the future will hold for Social Security, and while next year's COLA is looking good, the following year might bring no boost at all. And that's a chance you really can't afford to take.