A good 65 million Americans rely on Social Security to provide a steady stream of income in retirement. According to the National Academy of Social Insurance, Social Security represents the majority of income for 65% of beneficiaries. Furthermore, Social Security is the sole source of income for approximately 24% of people 65 and older. So it stands to reason that those who count on Social Security eagerly await a benefits increase each time a new year rolls around.
Unfortunately, for 2016, that didn't happen. For the first time in five years, Social Security beneficiaries didn't see so much as a dime added to their monthly benefit checks.
How COLAs work
Back in the day, it took special legislation for Social Security beneficiaries to get an increase in benefits. It wasn't until 1972 that Congress enacted the cost-of-living adjustment (COLA) provision, which allows for an automatic increase in benefits year after year. But these days, Social Security is designed to keep up with inflation -- at least in theory. Because beneficiaries may not have another source of income, the only way for them to retain their purchasing power in the face of inflation is to get a boost in benefits as prices for goods and services rise.
That's why the Social Security Administration makes an cost-of-living adjustment most every year.
The problem with COLAs is that they're based on the Consumer Price Index, or CPI, which measures pricing changes over time for common consumer goods and services. When the CPI points to a rise in prices, a COLA is applied to Social Security benefits to help recipients keep up. But when the CPI indicates that prices haven't gone up, or have actually gone down, Social Security benefits remain stagnant.
Now you may be thinking: "Do consumer prices ever really drop enough to wipe out COLAs?" And the answer is yes. Because gas prices dropped nearly 30% in the 12-month period from which this year's CPI data was obtained, the numbers just don't add up to a COLA for Social Security recipients.
Critics of this system argue that the CPI is only one measure of inflation and that it doesn't provide a comprehensive picture of the rising living costs that Social Security beneficiaries face. But for now, there's no way around it. A stable or declining CPI means no increase in Social Security benefits, period.
A harsh blow
This isn't the first time in recent years that Social Security benefits haven't gone up. Beneficiaries were denied a COLA back in 2010 and 2011. But for those who depend on Social Security, it's no easy pill to swallow. Despite the fact that recent increases were far from monumental -- prior to 2016, benefits climbed by less than 2% for three years in a row -- every little bit helps. The average retiree, for example, saw an extra $22 per month last year in Social Security benefits, which can actually go a long way for someone on a fixed income.
While it's too soon to predict what 2017 will have in store as far as a benefits increase is concerned, recipients are being advised to brace for a second consecutive year with no increase. On the bright side, those who depend on Social Security can rest assured that their benefits won't go down this year or the next, even if consumer prices continue to fall. Of course, that's not much of a silver lining, but for most folks who rely on Social Security, it's the best they're going to get.