Each month, more than 62 million people receive a Social Security benefit check, nearly 7 out of 10 of whom are retired workers. Of these aged beneficiaries, 62% lean on their guaranteed payout to account for half of their monthly income, with a third essentially reliant on Social Security for all of their income (90% to 100%). In essence, it's an absolutely indispensable program for aged beneficiaries.

With that being said, there's no specific event that bears more importance for seniors each year than the cost-of-living adjustment (COLA) announcement in mid-October.

Two Social Security cards partially covering a hundred dollar bill.

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Explaining Social Security's cost-of-living adjustment

Think of COLA as nothing more than the "raise" that beneficiaries receive from one year to the next. It's designed to measure the price inflation for goods and services that beneficiaries face and then translate that into a percentage increase in benefits.

COLA, which was first introduced in 1975 and signed into law by President Richard Nixon in 1972, is calculated by the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The average reading from the third quarter of the previous year (July through September) serves as the baseline figure, while the average reading from the third quarter of the current year acts as the comparison. If prices rise year over year, which has happened in all but three years since 1975, then beneficiaries receive a COLA that's commensurate with the percentage increase, rounded to the nearest 0.1%. And if prices fall, as happened in 2010, 2011, and 2016, then benefits remain static from one year to the next. Benefits, thankfully, cannot decline due to deflation.

As announced on Oct. 11, Social Security's COLA for 2019 is 2.8%, which represents the largest "raise" since 2012. Substantially higher energy prices (gasoline and fuel oil) were responsible for pushing costs higher, with moderate inflation also witnessed in shelter costs (e.g., rent and housing). Ultimately, for the average retired worker it should translate into about $40 extra per month in 2019, or close to $480 for the year.

However, not everyone will be reaping the benefits of the largest COLA in seven years. To understand why, we first have to take a trip back in time to the early part of the decade.

A visibly worried senior man drinking a cup of coffee with a pile of bills sitting in front of him on a table.

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Hold harmless will hold back COLAs for 2 million Americans in 2019

Following the end of the worst economic downturn the U.S. had seen in seven decades, the nation underwent two years of deflation, as measured by the CPI-W. This meant that Social Security beneficiaries received the same monthly benefit in 2009, 2010, and 2011. Unfortunately, medical care inflation wasn't flat. In fact, for years we witnessed the cost of prescription medicine and other aspects of medical care soar much faster than Social Security's COLA.

During the early part of the decade, Social Security beneficiaries who were also enrolled in Medicare were likely thankful for a provision known as "hold harmless." The hold harmless rule protects Social Security recipients from having their benefit reduced by an increase in Part B premiums -- Part B covers outpatient services. It allowed millions of dually enrolled elderly Americans to pay less than the standard Part B premium for years, while still maintaining their coverage.

However, in 2018, things changed. The Part B premium remained static at $134 a month from the previous year, and the 2% COLA that was passed along to beneficiaries was used to play catch-up for those who'd been previously protected by the hold harmless rule. It meant that quite a many seniors didn't reap the benefits of the 2% COLA this year.

The good news is that, with a lot of dually enrolled seniors now paying the standard Part B premium, many will see an increase in their 2018 Social Security payout beginning in January. The downside is that an estimated 2 million dually enrolled seniors, many of whom are low income, will still be playing catch-up as a result of hold harmless in 2019, according to CNBC. As the icing on the cake, Part B premiums are rising by $1.50 a month to $135.50 in 2019, which moves the goalposts just a bit farther down the road for these lower-income seniors. 

Considering that 43.4 million seniors were receiving a retired worker benefit in October, it means that nearly 1 in 20 won't reap any benefits from the largest COLA in seven years.

An elderly man looking at a small pile of change being held by the woman to his left.

Image source: Getty Images.

A loss of purchasing power will hurt seniors, too

And don't think the remaining 19 out of 20 seniors will fare any better, even with a reasonable COLA.

According to an analysis from The Senior Citizens League, the purchasing power of Social Security dollars has declined by 34% since 2000. That's because the CPI-W does a poor job of measuring the inflation that seniors are actually contending with.

As noted in the name, the CPI-W measures the spending habits of urban and clerical workers, who happen to have very different spending habits than senior citizens. As a result, important expenditures for seniors, such as medical care and housing, tend to be underrepresented in the CPI-W, while lesser-important costs, such as education, apparel, and transportation, bear more weight.

To be clear, both Democrats and Republicans recognize this to be a problem. Unfortunately, neither party has any intention of finding a middle ground solution to resolve the shortcomings of the CPI-W. Both parties have offered a fix, but they're on opposite ends of the spectrum, and therefore extremely unlikely to carry enough support to amend Social Security on Capitol Hill.

In other words, most everyone continues to lose out.

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