If you haven't yet heard, Social Security recipients are getting a 2.8% increase in their monthly checks next year. Don't get too excited, though, because the increase is based on past inflation rates, and that means retirees are already spending the increase on increasingly expensive goods and services. Worse still, because many recipients are underpaying Medicare Part B premiums because of Social Security's hold harmless provision, a big chunk of next year's increase could wind up going to Medicare rather than recipients' wallets. 

What's the story?

Millions of Americans rely on Social Security for more than half of their retirement income, so Social Security is a critical financial safety net for America's elderly. 

A senior couple surprised by what they're seeing on a laptop.

IMAGE SOURCE: GETTY IMAGES.

The program's designed to replace about 40% of the average worker's pre-retirement income, and every year Social Security crunches the numbers to determine if a cost of living adjustment (COLA) increase is warranted because of inflation, or the rising cost of goods and services.

Specifically, Social Security compares the average Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter to the average reading in the third quarter of the year in which a COLA increase was last awarded. Because recipients received a 2% COLA increase in 2018, Social Security compared this year's third-quarter CPI-W to last year's third-quarter CPI-W. 

The comparison revealed that the average worker's costs increased by 2.8% in the past year, so Social Security recipients will see their monthly Social Security income grow by that same amount in 2019.

The problem, however, is the COLA calculation is a rearview-mirror look at the costs of goods and services, and while costs can decline, such as during a recession, they usually go up, not down. If inflation increases in 2019, seniors' income will remain behind the curve, despite next year's increase.

People held harmless play catch-up

Social Security recipients who pay their Medicare Part B premiums directly out of their Social Security checks are eligible for hold harmless, a provision that prevents Part B premiums from growing faster (in dollar terms) than Social Security checks.

Over the past few years, Social Security COLA increases have trailed the increase in Part B premiums, and as a result, millions of Americans are paying less in monthly premiums for Part B than they're supposed to. Unfortunately, hold harmless is a temporary reprieve, so recipients have to play catch-up every time Social Security awards a COLA increase. In 2019, Medicare Part B premiums are $135.50 per month, so anyone who's paying less than that will see at least some of their Social Security COLA increase go to Medicare, rather than to offsetting inflation. 

The stark reality is COLA increases fall short

The current calculation for awarding COLA increases is based on prices paid for goods and services by workers, and workers don't spend their money on the same things the elderly do. For instance, workers spend more money on transportation and clothing, while the elderly spend more money on healthcare.

The big problem is that healthcare inflation has grown much faster than COLA increases since 2000, so retirees' purchasing power has steadily declined. According to The Senior Citizens League, Social Security payments have increased 46% since 2000 but the average retiree's expenses have almost doubled over that same period. Because expenses are increasing faster than COLA, the purchasing power of the average retiree has fallen by 34%, including a 4% drop in 2017.

A senior man shrugs.

IMAGE SOURCE: GETTY IMAGES.

What can fix this problem

The simplest way to correct this problem is to shift Social Security's COLA calculation to a measure that more accurately reflects retiree spending. Unfortunately, there's little momentum for that to happen. Organizations, including The Senior Citizens League, are advocating for this change, but politicians have shunned the concept so far. Instead, they've suggested shifting from CPI-W to CPI-U, a measure of inflation for all urban Americans. CPI-U has grown even more slowly than CPI-W, though, so making that change could widen the gap between COLA increases and spending, rather than narrow it. 

Overall, nobody's going to complain about getting a 2.8% increase because something is better than nothing, after all. But the increase isn't going to remove the threat of financial insecurity for most retirees, and that's no laughing matter.

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