Personal Finance

Here's What a 2% COLA in 2018 Would Mean for the Average Social Security Beneficiary

A Social Security card mixed in with a pile of cash.

As of August, more than 42 million retired workers were receiving a monthly stipend from the Social Security Administration (SSA). A majority of these retirees (62%) rely on their monthly paycheck to account for at least half of their income. Thus, any major changes to Social Security are bound to have the undivided attention of our nation's retirees.

All eyes are on cost-of-living adjustments

October is what you might call the month of months when it comes to Social Security changes. Usually in mid-October, the SSA announces inflationary increases to the maximum taxable earnings cap, as well as the maximum monthly benefit at full retirement age. But the annual change the bears the most interest for seniors is the cost-of-living adjustment (COLA), which should be due out in a matter of days now.

A Social Security card mixed in with a pile of cash.

Image source: Getty Images.

Social Security's COLA, in its plainest form, is the "raise" that beneficiaries can expect from one year to the next. The tether used to measure inflation for Social Security is the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The average reading during the third quarter of the previous year (July through September) serves as the baseline figure, while the average reading of the CPI-W from the third quarter of the current year acts as the comparison. If the average price of goods and services rises across the eight major categories analyzed, then Social Security beneficiaries receive a raise that's commensurate with the percentage increase, rounded to the nearest 0.1%. If prices unexpectedly fall year over year, Social Security benefits remain stagnant. Thankfully, they can't drop due to deflation.

In three of the past eight years, Social Security recipients have received no COLA, primarily a result of plunging energy prices. This year, they also received the smallest COLA on record at just 0.3%. As you might imagine, Social Security beneficiaries, and more specifically retired workers, are looking for a healthier "raise" for 2018. And it certainly looks like they'll get it.

A senior man counting his Social Security income.

Image source: Getty Images.

Here's what the average beneficiary can expect

Heading into the third quarter, inflationary data had cooled almost every month between February and July, which isn't a good sign for retirees who want a bigger raise. However, Hurricanes Harvey and Irma, which wreaked havoc on the U.S. and Caribbean, disrupted refiners and oil production, sending crude and gasoline prices notably higher. Gas prices alone were up by 6% at the pump during August. Energy prices are included in the "transportation" category of the CPI-W, meaning they're going to provide a healthy inflationary effect on Social Security's COLA in 2018.

Though it's unclear exactly how much of a boost seniors could see, a COLA of around 2% does seem reasonable after the August CPI-W reading came in at an annual inflation rate of 1.9%, and the September reading was expected to be helped by rising fuel prices.

What would a 2% COLA actually mean for Social Security recipients? Plainly, it means an across-the-board increase of 2% over what beneficiaries were being paid in 2016. Since the average retired worker was bringing home $1,371.14 as of August 2017, a 2% raise would put an added $27.42 a month in their pockets, or $329.07 a year.

A worried man in a suit covering his mouth in disbelief.

Image source: Getty Images.

Before you start cheering...

Of course, some folks may still have to kiss some of this increase goodbye. For those of you who are currently enrolled in Medicare and Social Security, and who've been protected from having their Part B (outpatient services) premiums skyrocket by the "hold harmless" clause, you'll likely be on the line for a commensurate increase in your Part B premium costs in 2018. Even if Part B costs stay the same or drop in 2018, many could see their Part B premiums rise by around 2%. Still, that should only account for an extra $2 to $2.50 a month.

The real disappointment comes from the fact that medical care inflation and housing costs, including rental inflation, continues to outpace Social Security's COLA most years. In fact, over the previous 35 years, medical care inflation has topped Social Security's COLA in 33 of them. In other words, retired workers aren't getting a raise that's truly commensurate with their expenses -- and that's a problem.

Unfortunately, it's also a problem that isn't easily remedied. Some lawmakers have suggested switching Social Security's inflationary tether from the CPI-W to the Consumer Price Index for the Elderly (CPI-E). As the name implies, it would only factor in the expenditures of households with seniors aged 62 and up. While making this change would probably result in higher COLAs more years than not, it would also drain Social Security of asset reserves that it simply can't spare right now.

Thus, while the 2018 COLA will likely be the highest in six years, it's not exactly something to cheer about.

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