Social Security

Social Security Benefits and the Annual COLA

The federal government announces the annual cost of living adjustment (COLA) on Social Security benefits each October.

Updated October 31, 2018

The federal government reports that the official cost of living adjustment (COLA) for Social Security benefits will be 2.8% for 2019. In 2018, Social Security paid benefit recipients a 2% cost of living adjustment, and in 2017, the COLA was just 0.3%.

Social Security Benefits and the Cost of Living Adjustment

There are about 62 million retired and disabled Americans who receive Social Security benefits, and another four million receiving SSI for disability. The amount of benefits a Social Security recipient collects each month is determined by the person's earnings history. The average monthly benefit for retirees is over $1,400 and $1,200 for those with disabilities who receive SSDI. Once an individual starts receiving monthly benefits, whether due to retirement or disability, his or her monthly benefit is typically increased each year to keep pace with the general increase in pricesthis is known as the Cost of Living Adjustment (COLA). Indexing the Social Security benefit to inflation prevents the purchasing power of beneficiaries' monthly checks from decreasing over time.

The COLA is determined each year by the Social Security Administration based on inflation over the previous year. In particular, SSA looks at uses a measure called the CPI-W, the Consumer Price Index for Urban Wage Earners and Clerical Workers, which looks at price changes of a "basket" of goods and services to determine the rate of inflation. The CPI-W is calculated by the Bureau of Labor Statistics, and measures the prices of food, clothing, housing, transportation, medical care, recreation, education, and many other goods and services. The CPI-W average during the third quarter of the previous year (July-September) is compared to the CPI-W average during the third quarter of the current year.

The COLA Controversy

Some observers and many Social Security recipients think the annual COLA isn't high enough. One argument is that the CPI-W is not an accurate measure of inflation's impact on seniors, and that the Consumer Price Index - Elderly (CPI-E) should be employed instead. The CPI-E is a measure that gives greater weight to goods and services used disproportionately by seniorsmedical care, for example.

Others argue that Social Security recipients shouldn't get an cost-of-living increase when inflation is flat or negative. Because the COLA is designed to maintain purchasing power, they maintain, it does not make sense to offer a COLA when they're is no inflation. Many argue that the Social Security program is not sustainable in its current form, and that savings must be found wherever possible. Read our article on the future of Social Security for more information.

The Medicare Safe Harbor Provision

For millions of individuals whose Medicare Part B premiums are deducted straight from their Social Security check, a federal "safe harbor" provision effectively freezes their Medicare premiums when the COLA is zero (as it was for 2010, 2011, and 2016). This law is intended to prevent Social Security benefits from decreasing in nominal terms from one year to the next.

When this happens, those who enroll in Medicare Part B for the first time during a zero-COLA year, along with those who are not collecting Social Security benefits, will pay higher Part B premiums than those whose premiums were frozen under the safe harbor provisions.

The safe harbor provisions will kick in for a limited number of Medicare beneficiaries in 2019, since the Part B premium increased only to $135.50 from $134 per month. For most, the 2.8% Social Security COLA will more than cover this increase.

Questions for Your Attorney

Depending on your situation, it may be a good idea to contact an estate planning or tax adviser about these developments. Some common questions for your adviser might include:

  • How will the absence of COLA or changes in Medicare premiums affect my financial situation?
  • How much can I expect to receive in Social Security benefits when I retire? Is it wise for younger workers to factor Social Security benefits into their planning at all?
  • Do I need to make any changes now to my retirement plans in light of possible changes to Social Security that may occur?

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