Millions of retirees have to get by without any significant amount of savings, and for them, Social Security is just about the only reliable source of income they'll see month in and month out. One of the biggest advantages of Social Security benefits is that they have built-in adjustments for inflation, as the amount that the federal government pays out typically goes up each year in January.

Unfortunately, the size of the annual increases for Social Security recipients isn't always that big. The boost for 2020 falls in the middle of the range over recent years, but even though it'll be helpful to those who have to get by on a fixed income, it won't make a material change in their standard of living. In fact, when you consider some other costs, it might not even be able to keep up with price increases for the things that older Americans need most.

Rubber-banded bundles of cash of various denominations.

Image source: Getty Images.

The average American retiree's Social Security payment

Because of inflation and wage increases, the average benefit for Social Security recipients typically goes up over time. That's largely due to the way that the benefit formula calculates how much each person will receive, based on their work history and length of career.

However, the increase isn't steady. Some years, the average goes up only by a small amount, while other years feature big boosts. Over the past eight years, annual increases have ranged from just $13 in 2016 to $57 in 2019.


Average Social Security Benefit for Retired Workers



















Data source: Social Security Administration.

2020's increase of $42 per month amounts to a 2.9% increase. It stems from a 1.6% cost of living adjustment for benefits at the beginning of 2020, with the rest coming from the rise in average earnings compared to what previous years' cohorts received.

Why big increases don't help

At first glance, it might seem like a solid increase is good. But the problem is that the reason why you get a big boost to your Social Security is that prices have gone up. If you're on a fixed budget and don't have room for luxuries, then paying more for what you need will soak up the amount of extra money you receive from Social Security.

In addition, some people argue that the measure of inflation that Social Security uses doesn't accurately reflect price increases for the goods and services that retirees use most. The metric that the SSA employs is a more general measure of inflation, and it incorporates assumptions that many believe are more appropriate for younger people who are still working.

Lastly, in comparing net payments from Social Security, you also have to take into account any money that's automatically withheld from benefit payments. For most retirees, that includes Medicare costs. With monthly premiums for medical insurance under Medicare's Part B coverage going up more than $9 a month in 2020, the net amount a typical Social Security recipient would get will only go up by $33 per month on a net basis.

Enjoy your raise -- but be careful

When you get a bigger check from the government, it's tempting to just treat it as found money and go about your business. But with Social Security, larger benefit payments come only because of the higher prices you'll face. It might be better than not getting any extra money at all. However, you also should stay on your guard not to think that you're flush with cash just because of a slightly bigger Social Security check.