Tens of millions of Social Security recipients and other retirees will get a 2.8 percent increase in benefits next year as inflation edges higher. For the average retired worker, it amounts to $39 a month.
After a period of low inflation, the increase for 2019 is the highest in 7 years.
The cost-of-living adjustment, or COLA, affects household budgets for about one in five Americans, including Social Security beneficiaries, disabled veterans, and federal retirees. That’s about 70 million people, enough to send ripples through the economy.
Automatic inflation protection has been a standard feature of Social Security since 1975. Social Security recipients also gain from compounding because COLAs becomes part of their underlying benefit, the base for future COLA increases.
Nonetheless, many retirees and their advocates say the Social Security COLA is too meager and doesn’t reflect higher health care costs for older people. Federal budget hawks take the opposite view, arguing that annual increases should be smaller to reflect consumers’ penny-pinching responses when costs go up.
With the COLA, the estimated average monthly Social Security payment for a retired worker will be $1,461 a month next year. Other Social Security beneficiaries include disabled workers and surviving spouses and children. Low-income disabled and elderly people receiving Supplemental Security Income also get a COLA.
Retiree Danette Deakin, of Bolivar, Missouri, says she feels as though her cost-of-living adjustment is already earmarked for rising expenses. Her Medigap insurance for costs not covered by Medicare is going up, and so is her prescription drug plan. She expects her Medicare Part B premium for outpatient care will also increase, although the government hasn’t released that yet.
“It isn’t enough of an increase that it takes care of all of the increases from health care, plus rent — our rent gets increased every year,” said Deakin, 70, who worked in the finance department at a boat dealership.
Health care costs eat up about one-third of her income, she estimated.
“I appreciate the COLA adjustment, and in no way am I complaining,” Deakin added. “It’s just that every single thing you can talk about goes up. It doesn’t go down.”
By law, the COLA is based on a broad index of consumer prices calculated by the government. Advocates for seniors claim the general index doesn’t accurately capture the rising prices they face, especially for health care and housing. They would like the government to switch to an index that reflects the spending patterns of older people.
“What the COLA should be based on is still a very real issue,” said William Arnone, CEO of the National Academy of Social Insurance, a research organization not involved in lobbying. “Older people spend their money in categories that are going up at a higher rate than overall inflation.”
The COLA is now based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, which measures price changes for food, housing, clothing, transportation, energy, medical care, recreation, and education.
Advocates for the elderly would prefer the CPI-E, an experimental measure from the government that reflects costs for households headed by a person age 62 or older. It usually outpaces general inflation, though not always.
COLAs can be small or zero, as was the case in several recent years. People often blame the president when that happens. However, the White House can’t dictate the COLA, which is determined by non-political experts. If there were to be any revisions, President Donald Trump would have to persuade Congress to change the underlying law.
Trump has repeatedly vowed not to cut Social Security or Medicare. But the government is running $1 trillion deficits, partly as a result of the Republican tax-cut bill the president claims as one of his main achievements. Mounting deficits will revive pressure to cut Social Security, advocates for the elderly fear.
“The revenue loss in the tax bill contributes to much higher deficits and debt, and that is where the threats begin to come in,” said David Certner, policy director for AARP. “Social Security, and in particular the COLAs, have been the target.”
Beyond federal budget woes, Social Security faces its own long-term financial problems and won’t be able to pay full benefits starting in 2034.
Former President Barack Obama floated — but ultimately dropped — a proposal called chained CPI, which would have slowed annual COLAs to reflect penny-pinching behavior by consumers. The idea behind it is that when the price of a particular good or service rises, people often respond by switching to a lower-cost alternative.
Because of compounding, smaller COLAs would have a dramatic effect over time on the federal budget and Social Security finances. But if inflation continues to rise, proposals to scale back cost-of-living adjustments carry greater political risk.
Social Security is financed by a 12.4 percent tax on wages, with half paid by workers and the other half paid by employers. Next year, the maximum amount of earnings subject to the Social Security tax will increase from $128,400 to $132,900.
About 177 million workers pay Social Security taxes. Of those, nearly 12 million workers will pay more in taxes because of the increase in taxable wages, according to the Social Security Administration.