Millions of seniors collect Social Security in retirement, and while those benefits were never designed to sustain recipients by themselves, a large number of folks rely on them to provide the bulk, if not all, of their income. That's why so many seniors depend heavily on Social Security's annual cost-of-living adjustments, or COLAs.
COLAs were introduced back in the mid-1970s, and their purpose is to help retirees retain their purchasing power in the face of inflation. COLAs are based on inflation data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If the CPI-W shows an increase, a formula is applied that determines how much Social Security benefits will rise. But if the index doesn't increase, beneficiaries don't get a COLA.
The latter scenario, in fact, has happened three times in the past decade alone, and initial data from the CPI-W indicates that seniors might not see a COLA in 2020, either. Of course, it's too soon to predict a COLA that isn't set to be determined for another nine months. Still, seniors should prepare for the possibility that this past year's 2.8% raise could be the biggest they'll see for a while. In fact, what recipients should really do is forget about COLAs and take steps to maintain their buying power independently -- because even when COLAs do come through, they're often relatively meaningless.
COLAs just can't keep up
Though COLAs are designed to help seniors keep pace with inflation, for the most part, they fall short. Since 2000, Social Security beneficiaries have lost 34% of their buying power, reports the Senior Citizens League.
Part of the problem stems from the way COLAs are calculated. Though a useful benchmark for other purposes, the CPI-W aggregates spending data for urban and clerical workers, many of whom aren't seniors collecting Social Security. As such, their primary expenses are apt to differ from those seniors typically face, thereby resulting in an imperfect measure for COLAs. But for now, the CPI-W is what beneficiaries are stuck with, which means there's a good chance that seniors will continue getting shortchanged.
That said, all isn't lost for seniors hoping to exercise some control over their financial fate. Those who currently live benefit-to-benefit can work on reducing their expenses so they're less reliant on COLAs to keep up. Downsizing, for example, is a great way to cut costs in retirement, as is relocating to a less expensive part of the country.
Working part-time is also an option for seniors who find themselves desperate for a raise. With the gig economy in full swing, there's no reason retirees can't get a piece of it, whether in the form of consulting in their former fields, starting businesses, or monetizing hobbies.
It's too early to say what next year's COLA will look like for seniors, or whether there will be a COLA at all. But one thing's for sure: COLAs are not only unreliable, but also relatively ineffective. The sooner more seniors realize that and take steps to cut back on expenses and proactively boost their income, the less financially fragile they'll be as they navigate retirement.