Each year, seniors on Social Security eagerly await their cost-of-living adjustment, or COLA, which dictates how much of a boost their monthly benefits will get. In 2019, seniors saw a fairly decent 2.8% COLA, which left many a bit more optimistic about their financial prospects, at least at first. But new data from the Senior Citizens League reveals that despite a respectable COLA, most seniors did not receive a substantial boost to their monthly income last year. And that's troubling on so many levels.
How much did benefits climb last year?
Last year's 2.8% COLA should have, in theory, raised the average benefit of $1,422 all the way up to $1,461, resulting in an extra $39 a month for the typical senior. But according to the Senior Citizens League, 45% of Social Security beneficiaries got a monthly income boost of $10 or less in 2019 after accounting for Medicare Part B premium deductions (those premiums are paid directly from Social Security benefits for seniors enrolled in both programs). Meanwhile, 25% of seniors saw a monthly raise that fell between $10.01 and $25, and only 30% of beneficiaries saw their monthly Social Security income rise by more than $25.
This year's COLA could be even less effective
The above-mentioned numbers don't bode well for seniors who are heavily reliant on Social Security to stay afloat this year. The COLA going into 2020 was a mere 1.6% -- barely more than half of the 2.8% COLA seniors saw going into 2019. But what's more disturbing is the fact that Medicare premiums rose a lot more in 2020 than they did in 2019.
Going into 2019, seniors saw a modest $1.50 increase in their Part B premiums, paying $135.50 a month instead of the $134 they paid in 2018. This year, the standard Part B premium is $144.60, representing a $9.10 jump.
Now, if 45% of seniors last year saw their Social Security benefits go up $10 or less per month with a 2.8% COLA and $1.50-a-month Medicare premium hike, it stands to reason that things aren't looking too good for the current year, what with a much larger Medicare increase and a much lower COLA. As such, we're likely to see even more depressing numbers once this year's data is crunched.
Making up for a meager raise
Seniors who are heavily dependent on Social Security may need to employ some serious lifestyle changes this year to avoid falling behind on bills. These could include downsizing, moving to a less expensive part of the country, or working part-time to generate income on top of Social Security.
Current workers, meanwhile, would be wise to look closely at the numbers above and understand why they underscore the importance of saving for retirement independently. Clearly, Social Security raises aren't all that effective, even during years when COLAs are relatively generous. Those who don't wish to struggle financially during retirement can boost their savings as much as they can, and keep their savings invested in a reasonably aggressive fashion to generate additional retirement income.
The purpose of Social Security COLAs is to help seniors retain their buying power in the face of inflation. But clearly, a monthly boost of $10 or less isn't going to do much for the typical retiree. On the other hand, a robust IRA or 401(k) that continuously generates growth in retirement could not only be the ticket to compensating for those measly COLAs, but to long-term financial security.