Seniors who rely on Social Security to pay their bills depend heavily on cost-of-living adjustments, or COLAs, to keep up with ever-rising expenses. COLAs were implemented in the 1970s to help beneficiaries retain their buying power in the face of inflation, and they're based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures annual cost increases for common goods and services.

In 2019, seniors were granted a 2.8% COLA -- Social Security's highest in years. This year, however, the benefit raise may not be as generous.

The Senior Citizens League is estimating that 2020's COLA will come in at 1.2% based on current data from the CPI-W coupled with projections for the months ahead. (An official COLA won't be made public until October.) That increase would take the average monthly benefit of $1,461 up to $1,478 -- a $17 raise. That's certainly not much to write home about, but it is better than nothing. The problem, however, is that if Medicare premiums go up as expected, that COLA could effectively amount to nothing.

Senior man with serious expression sitting and holding cane


The problem with Medicare increases

Though Medicare Part A, which covers hospital care, is free for most seniors, Part B, which covers doctor visits and diagnostics, charges a monthly premium. Seniors who collect Social Security can have those Part B premiums deducted directly from their benefits. They're also guaranteed not to lose Social Security income when premiums rise rapidly.

It's a provision known as the hold harmless clause, and its purpose is to ensure that Social Security recipients don't see a decrease in benefits due to Medicare hikes. Let's say Medicare Part B premiums rise by $28 a month in a given year, while Social Security's COLA raises a senior's benefit by $21. To pay the entire Medicare increase would result in a $7 income loss for that senior. Instead, the hold harmless provision caps the Medicare increase at $21 in this scenario.

Based on the latest Medicare Trustees Report, the Senior Citizens League anticipates an $8.80 uptick in Part B premiums going into 2020 -- a 6.5% increase. For the average Social Security recipient, that would effectively wipe out half of the $17 raise a 1.2% COLA would allow for. And for seniors receiving a lower monthly benefit, it could wipe out their COLA entirely.

This all assumes that there will even be a COLA, as projections earlier this year called for none at all. Either way, seniors eagerly awaiting that raise should brace for the possibility that it won't put much, if any, money back in their pockets.

Rely less heavily on Social Security

Seniors are generally advised to have income outside of Social Security, as those benefits aren't designed to serve as their only means of paying the bills in retirement. For the average earner, Social Security will replace about 40% of his or her pre-retirement income. Most seniors, on the other hand, need roughly double that amount to cover basic expenses and also pay for things like entertainment. That's why saving independently is key, whether in an IRA, 401(k), or another type of account.

Small amounts of savings can make a huge difference over time. Setting aside $300 a month over 30 years, for example, will produce a $340,000 nest egg, assuming an average annual 7% return on investment for that money.

Seniors who are already in retirement, meanwhile, can improve their financial picture by cutting back on expenses or taking on part-time work to boost their income. Both are reasonable options when Social Security isn't doing a good enough job of paying the bills, and since seniors could be facing a meager raise in 2020, it's a path many may ultimately be forced to take.