Retirees need income, and Social Security is a key funding source that tens of millions of Americans use to help make ends meet in retirement. One big advantage that Social Security has over many other sources of income for seniors is that its monthly payments are subject to cost-of-living adjustments. Those COLAs typically result in gradually rising benefits over time, and at this point, early indications suggest that the cost-of-living adjustment that will take effect at the beginning of 2019 should come in between 2.5% and 3%.
However, retirees have gotten burned before by announced raises like this, because as it turns out, many didn't get to see their actual monthly benefit amounts rise. The reason: a key expense that gets withdrawn from most Social Security recipients' checks. Yet the primary obstacle that prevented many people from getting raises is no longer there for many Social Security recipients. Below, we'll explain in greater detail why the odds are better that you'll get a real raise this year than in the recent past.
Why does Social Security make bigger payments?
Every year, the Social Security Administration looks at inflation data from the Bureau of Labor Statistics to measure how much costs have increased for those receiving Social Security. In particular, the SSA looks at a specific measure of the Consumer Price Index known as the CPI-W, calculating the average level of this index for the three months between July and September. It then looks back to what the corresponding average figure was for July to September of the previous year. Whatever the percentage difference between the two numbers is becomes the cost-of-living adjustment that takes effect the following January, rounded to the nearest tenth of a percentage point.
In 2017, the SSA calculated the three-month average for the CPI-W to be 239.668. This year, we don't yet have the September figure, but using the index levels for July and August, the current average is 246.246. Do the math, and you get a projected COLA of 2.7%.
When you look at the 43.4 million retired workers receiving Social Security benefits, the latest available statistics show an average monthly benefit of $1,416. If you add 2.7% to that figure, you get an added $38 per month that's expected because of the COLA.
Will Medicare costs eat up your Social Security COLA again?
However, Social Security recipients in the past didn't actually see any increase in their net Social Security payments. That's because if you're on Medicare, the monthly premiums you pay for your Part B medical coverage usually get withheld directly from your Social Security benefits. When Medicare costs go up, more money gets taken out of your Social Security, which reduces the positive impact from the cost-of-living adjustment.
Medicare premiums for 2019 haven't yet been announced, but the projections used in the 2019 Medicare Trustees Report support the assertion that any increase in Part B monthly premiums would be modest. Yet even that hasn't been enough to save every Social Security recipient in the past. Medicare premiums were flat in 2018 compared to 2017 -- yet many people once again had to deal with little or no net increase in their Social Security payments.
Hold-harmless, Medicare, and your benefits
The cause of this problem started a couple of years ago. At the beginning of 2016, rising Medicare costs required a premium adjustment higher, but a lack of inflation meant that Social Security payments wouldn't get a COLA for that year. If Medicare had passed through its higher costs to Social Security recipients, then their net checks would have shrunk. A little-known law called the hold-harmless provision prevents that from happening, and instead, Medicare premiums were frozen for Social Security recipients.
The problem got worse in 2017. Premiums jumped again, but the COLA for Social Security was just 0.3%. That created a $25 average difference between what most recipients were actually paying for Medicare Part B and what they should have paid.
The issue was addressed to a large extent in 2018. At the beginning of this year, the typical Social Security recipient got a $27 higher monthly check than they did in 2017. For the majority of Medicare participants who had been subject to the hold-harmless provision in past year, that boost was enough to bring them up to paying the full premium amount for Part B coverage.
However, there are still a significant number of people -- roughly one in four -- who aren't yet paying the full amount. To the extent that past payments are less than the eventual premium amount that Medicare will calculate soon, Social Security checks won't necessarily go up by the full amount of the COLA. Only once that hold-harmless reduction is fully accounted for will full COLAs apply on a net basis.
Be ready for 2019
With hold-harmless impacts fading into the past, many Social Security recipients can expect to enjoy the full increase in their benefits come January. Yet there will still be many people who see the impact of hold harmless once again in 2019.