Financial Planning, Retirement, Economy

Will Social Security Recipients Notice The 2019 COLA?

10/18/18 8:00 AM

iStock-626627280.jpgAfter the September reading on consumer inflation was released by the Bureau of Labor Statistics last week, the U.S. Social Security Administration was able to officially announce that the millions of Americans that receive Social Security benefits or Supplemental Security Income payments will be provided with a cost of living adjustment (COLA) of 2.8 percent in 2019, in line with our earlier projection. That is the largest COLA since 2012, but for many retirees the increased benefit could be quickly eroded by their monthly insurance premiums.

Indeed, a “hold harmless” provision exists to help protect Social Security recipients from reductions to their benefits related to rising Medicare Part B premiums. Because of the way this special provision works, though, millions of older Americans will likely see no increase in their net operating Social Security payments for the fourth year in a row, according to an updated report from The Senior Citizens League (TSCL). Mary Johnson, a policy analyst for The Senior Citizens League, added that “Medicare Part B premiums rise several times faster than COLAs. … We are at the point where this is affecting far more people than anyone ever anticipated.”

As a result, The Senior Citizens League and other organizations continue to advocate legislation that would tie the annual COLA calculation to “a more fair and adequate” inflation measure, such as the Consumer Price Index for the Elderly (CPI-E). The CPI-E is an experimental measure of household price changes that some economists recommend as a potential alternative to the CPI for Urban Wage Earners and Clerical Workers (CPI-W) that is currently used in the government’s regular COLA calculation. The goal of the CPI-E is to more accurately track inflation for seniors based on the historical spending patterns of Americans 62 years of age and older.

The average annual increase for the CPI-E since 1983 was 2.8 percent, according to a new analysis from Boston College’s Center for Retirement Research (CRR), compared to just 2.6 percent for the CPI-W. As intended, the difference is largely attributable to healthcare outlays because the elderly spend roughly 70 percent more on medical care than the working population (relative to total expenditures). Social Security actuaries estimate that using the CPI-E instead of the CPI-W would on average result in a 0.2 percentage point increase to the annual COLA going forward. However, the CPI-E is not without its critics, and implementing it could be expensive.

The CRR researchers, for instance, said that switching to the experimental index “would cost 0.39 percent of taxable payroll over Social Security’s traditional 75-year cost horizon, which would require a substantial offsetting reduction in other benefits to make the change cost neutral.” Whether such a switch is even politically feasible is another unknown, which is why younger Americans should continue to utilize long-term participation in a tax-advantaged 401(k) plan and other retirement savings vehicles to help limit their old-age dependence on the government (Social Security), and in turn reduce their overall sensitivity to annual COLAs.

 


 

Sources: U.S. SSA, U.S. DoL, TSCL, Boston College (CRR)

Post author: Charles Couch