The long-awaited day for the more than 62 million Social Security beneficiaries has come and gone. A little more than a week ago, the Social Security Administration announced that all beneficiaries would be receiving a 2.8% cost-of-living adjustment (COLA) beginning in 2019. This "raise" represents the biggest increase in benefit payouts, on a percentage basis, since 2012, and is a healthy jump from the 2% bump up beneficiaries received in 2018.

But there's a lot more to be thankful for with regard to the 2019 COLA than simply the percentage that it's increasing.

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Understanding the role of the hold harmless provision

Arguably the single best thing about Social Security's COLA for next year is that more beneficiaries will be receiving a real increase in their net take-home from the program. The reason? There will be less of an impact from hold harmless in 2019.

For those of you who are unfamiliar with the hold harmless clause, I'd wager you're not alone. Hold harmless is a provision designed to protect people who are dually enrolled in Social Security and Medicare, and who have their Medicare Part B premium (the insurance for outpatient services) automatically deducted from their Social Security payout each month. If Part B premiums were to rise at a quicker pace than Social Security's COLA, on a percentage basis, it could result in a net reduction in what beneficiaries would receive in the following year. In order to prevent that from happening, lawmakers introduced the hold harmless provision. It essentially ensures that Part B premiums can never rise at a faster pace than COLA, on a percentage basis.

For new enrollees into Medicare, older workers who are enrolled in Medicare but not in Social Security, or people who prefer to be billed directly from Medicare rather than having their Part B premium automatically deducted from their monthly Social Security check, there are no hold harmless protections. But for the remaining percentage of existing dual enrollees in Social Security and Medicare, hold harmless prevents a rapid rise in Part B premiums.

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Here's why Social Security's COLA will actually mean something in 2019

Though hold harmless had been a savior for Social Security recipients since the beginning of the decade when COLAs were small or nonexistent, it turned into something of a nightmare in 2018.

You see, after years of rapid increases in the Medicare Part B premium, it remained flat this year at the $134-a-month standard rate. This meant that all of the dual enrollees who had been protected in previous years from rapid increases in Part B premiums by hold harmless had some catching up to do. The result was that many Social Security recipients didn't see much or any of the 2% COLA that was passed along this year. A poll from The Senior Citizens League (TSCL) found that 50% of the retirees it surveyed received a monthly payout increase of $5 or less this year. 

But that's about to change. Even though TSCL has estimated in its latest analysis that more than 5 million low-income Social Security beneficiaries are unlikely to see any net growth in their payout due to hold harmless playing catch-up in 2019, a considerably greater number of beneficiaries will see an increase in their real payout next year. With Medicare Part B premiums rising by a modest 1.1% to $135.50 next year, and quite a few beneficiaries having caught up on the standard Part B monthly rate, hold harmless will take less of a bite out of the upcoming years' COLA. That's great news. 

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Now, this stinks!

But, there's still a downside -- that being the inability of COLA to keep up with the actual inflation that seniors are contending with.

Social Security's inflationary tether is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Though designed to measure the cost of a predetermined basket of goods and services, as the name implies, it measures the spending habits of urban and clerical workers -- many of whom aren't receiving a Social Security benefit. The issue is that urban and clerical workers spend their money very differently than retired workers, who make up around 70% of all recipients, resulting in important costs like medical care and housing being underweighted in the COLA calculation. In short, seniors are unlikely to receive a COLA that offsets the true inflation they're contending with, regardless of what happens with Medicare Part B premiums.

Just as frustrating, there's really no easy fix to this COLA dilemma, despite both Democrats and Republicans disliking the CPI-W as Social Security's inflationary tether.

Democrats would prefer to see the Consumer Price Index for the Elderly (CPI-E) used instead of the CPI-W. The CPI-E would take into account only the spending habits of households with persons aged 62 and over. It would, presumably, better account for medical care and housing costs, thereby leading to higher annual COLAs.

Meanwhile, Republicans prefer the Chained CPI, which takes into account a consumer behavior known as substitution bias. If, for example, the price of beef rises 25%, a consumer might choose to buy pork of chicken in order to save money. This substitution would lead to an accurate form of inflation comparison, but also smaller annual COLAs -- likely even smaller than the CPI-W.

Since neither party can agree on what to do, Social Security income is expected to continue being eroded by inflation, no matter what sort of COLA recipients receive each year.