Millions of seniors depend on Social Security to pay the bills in retirement despite the fact that those benefits by themselves were never designed to sustain retirees. As such, Social Security's yearly cost-of-living adjustments, or COLAs, can make a huge difference in the lives of those recipients who are struggling to make ends meet.

Social Security's COLAs are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the cost of fuel and other common goods and services increases, Social Security tends to follow suit. The problem with the CPI-W is that it's an imperfect measure for determining benefit increases, since many of the costs incurred by urban and clerical workers don't mimic those incurred by seniors. But for now, that's how the system works.

A hand holding a Social Security card.


Beneficiaries certainly had something to celebrate on the COLA front in 2019 -- a 2.8% increase, which represented the largest raise seniors had seen in years. Unfortunately, Social Security's next boost may not be nearly as generous.

The latest Social Security Trustees Report, which was released in April, indicated that beneficiaries could see a mere 1.2% COLA going into 2020 -- far less than half the size of 2019's increase. That 1.2% raise would increase the average monthly retirement benefit by $17 for a total of $1,478 a month, or $17,736 a year. And while that's certainly better than nothing, it's hardly something to write home about.

What a negligible COLA means for seniors

The problem with a lower-than-average COLA is twofold. First, an estimated 21% of married beneficiaries and 43% of single beneficiaries 65 and over count on Social Security for 90% or more of their income. But those benefits are only designed to replace about 40% of the average earner's pre-retirement income, and most seniors need roughly double that amount to live comfortably. Anyone living solely or mostly on Social Security is therefore hovering dangerously close to the poverty line, and if the general cost of living increases more than 1.2% going into next year (which it likely will, based on historic inflation figures), beneficiaries stand to fall behind.

Furthermore, seniors who pay their Medicare Part B premiums directly out of their Social Security benefits could see their entire COLA wiped out next year if it indeed comes in as low as 1.2%, thanks to Medicare's hold-harmless provision. That rule is designed to prevent Social Security recipients from facing a reduction in benefits if their Medicare costs exceed their COLA in a given year. But if Medicare Part B premiums increase substantially in 2020, which they very well might, then Social Security recipients will effectively break even -- they won't be forced to pay more to the point where their benefits go down, but they also won't see any more money in their monthly Social Security payments.

It's too soon to tell

Social Security's upcoming COLA won't be announced till October, and there's still time for the CPI-W to shift in beneficiaries' favor. Seniors, however, shouldn't count on a big raise this year, and instead should take steps to lower their living costs in preparation for another meager raise. That could mean downsizing, or even moving to a less expensive part of the country.

Securing part-time work also isn't a bad idea for seniors who are otherwise banking on a more generous Social Security increase. Many retirees opt to consult in their former fields or even start businesses of their own. Both are a solid means of occupying one's time during retirement, thereby saving money on leisure. The key, either way, is to prepare for the fact that benefits might remain mostly stagnant going into 2020, and not get thrown by that reality down the line.