If you’re receiving Social Security benefits or Supplemental Security Income payments, you probably noticed something different in 2016: your benefits stayed exactly the same as the previous year. In other words, there was no cost-of-living adjustment (COLA).
Most years you’ll see a small bump in your benefits at the beginning of each year due to a COLA. Despite the fact that it’s not guaranteed, years without a COLA are fairly rare. Generally, beneficiaries have received anywhere from 1.7% (2015) to 5.8% (2009). This translates into small but important increases in Social Security benefits. In 2015, it was estimated that the average beneficiary received $22 more per month.
Why Wasn’t There a Cost-of-Living Adjustment in 2016?
Since 1975, COLA increases have been tied to inflation. The Office of Social Security uses something called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to decide whether there will be a COLA in a given year.
The CPI-W is the way the government tracks the monthly cost of a number of goods and services that the average American household buys. Basically, they create a shopping list of all the things that middle-class Americans will need to purchase in a given month. They then check the prices for these items across the country to determine how much it costs to buy those goods and services.
Had the CPI-W been higher during the third quarter of 2015 than it was during the third quarter of 2014, there would have been a COLA increase in 2016. Instead, the CPI-W in 2015 was slightly lower than it was in 2014, something many economists attributed to lower fuel prices. That meant there was no COLA in 2016.
In theory, this shouldn’t cause any problems for the average person who receives Social Security benefits. The reduction in the CPI-W means that the things you buy will cost less and it will all even out in the end. But when have theories ever worked out perfectly?
The Good News – Medicare Premiums
If you’re a low wage earner, there’s good news. Lawmakers realized that Medicare premium increases would create an unnecessary burden on low-income Social Security recipients. That meant that for most people receiving Social Security benefits or Supplemental Security Income payments, there was no increase to their Medicare premiums in 2016. However, those who made more than $85,000 face graduated surcharges which top out at 16%.
The Bad News – Your Retirement
If you’re currently retired, the lack of COLA has the potential to greatly impact your retirement. After all, the CPI-W is a generalized calculation that doesn’t take your specific costs and expenses into consideration.
You may have expenses that increase annually, even when inflation is going down. For example, if you rent your home, you might face an annual rent increase. You may also encounter additional health-related expenses. Without the COLA, you’ll have to find alternative ways to absorb these extra costs. Depending on your life stage, financial situation and health, absorbing these extra costs without a COLA might be difficult or impossible.
What Cost-of-Living Adjustment to Expect in 2017
Experts are mixed when it comes to predicting whether there will be a COLA in 2017. Some experts believe there will be a COLA of as much as 3%, whereas others believe 2017 will be another year without a COLA.
So far in 2016, the CPI-W has shown slight inflationary increases in the early months of 2016. However, since a COLA is based on third-quarter figures, only time will tell whether they will translate into an increase.
Ultimately, this is a great reminder about why you shouldn’t be including a COLA in your retirement planning. COLA is too unpredictable to budget for, and it’s best to have COLA be an unexpected surprise, rather than something you’re counting on.
