This article was updated on Nov. 20, 2016.
The Social Security program is one of the most important sources of income for millions of Americans retirees, with a huge proportion of recipients relying on their benefit payments for the bulk of their retirement cash flow. Social Security didn't offer a cost of living adjustment to its benefits for 2016, leaving recipients without any boost to their monthly checks. As much outcry as that announcement has already generated, though, 2017's cost of living adjustment will also be subpar.
Why your Social Security increase disappeared for 2016
As I warned late last year, the numbers that the Social Security Administration uses to index its benefits to the rate of inflation are transparent and easy to understand. Every year, the SSA figures out a cost of living adjustment that goes into effect beginning with January payments. To do so, the SSA looks at specific measures of the Consumer Price Index over the summer months and compares the average to the corresponding average during the same period in the previous year. If the average goes up, then the percentage by which it rises is that year's cost of living adjustment. If it stays flat or goes down, then there's no cost of living adjustment in the following year.
When the final summer 2015 CPI figures came out, they confirmed that 2016's cost of living adjustment would be zero. The average CPI-W value for the three-month period in 2015 was 233.278. That compares to the 234.242 figure from 2014, and since the 2015 average was less, Social Security benefits remained unchanged for 2016.
The problem ahead
Obviously, the fact that Social Security benefits didn't rise from a cost of living adjustment in 2016 was bad news for retirees who rely on their monthly checks for a big part of their overall income. Many have argued that the CPI-W doesn't accurately reflect the costs that retirees have to bear, and even with inflation apparently in check according to official government figures, many retirees report increases in the costs of the things that they need the most.
Yet what many people didn't realize is that the bad news for the 2016 COLA calculation will also carry forward to hold back any potential increase in 2017's cost of living adjustment. The reason is that in calculating the cost of living adjustment next year, the law governing the SSA required it to compare the three-month average figure with the average for the same three months of "the last year in which a COLA became effective." In other words, when it comes time to calculate the cost of living adjustment for 2017, the summer 2016 months were compared not to the lower average of 233.278 for 2015, but rather to the higher 234.242 average in 2014.
What's more, government inflation figures have shown that prices haven't bounced back very far from where they were in recent years. After declining in late 2015 and early 2016, the average CPI-W reading for the summer months turned out to be 235.057, up just 0.3% from the summer 2014 average against which the 2017 cost of living adjustment was to be measured. That's far less than cost-of-living adjustments in the more typical range of 1% to 2% that we've seen in past years.
Is there any silver lining?
For retirees, a lack of cost of living adjustment can mean they have to tighten their belts further. Yet there are some positives. For those Social Security recipients who are enrolled in Medicare and have their premiums taken directly from their benefit checks, planned increases in premiums for Part B medical coverage in 2016 did not take effect because of hold-harmless provisions that limit such increases to the rate of a cost of living adjustment. Also, for those who haven't yet retired, the wage base on which workers have to pay Social Security payroll taxes also remained unchanged in 2016 at $118,500, compared to the $1,500 increase in 2015. A small COLA would allow Medicare premiums to rise, but the increase might not be sufficient to cover all of the program's increased costs.
Nevertheless, many believe that Social Security recipients deserve an increase regardless of the COLA calculation. Efforts from lawmakers to pass legislation that would boost benefits hasn't gone anywhere thus far, but many believe that the COLA's calculation method is flawed because the primary causes for the drop in the CPI don't help senior citizens as much as those who are working.
Those who are getting Social Security need to keep their eyes on inflation figures. Given the ongoing lack of any inflationary pressure, it has indeed turned out that the cost of living adjustment for 2017 will be less than retirees would have liked to see.