Update: The SSA just announced the COLA for 2017. Social Security beneficiaries will receive a 0.3% increase in benefits next year. The COLA remains low due to low inflation. More details soon…
One of the greatest benefits of Social Security is that recipients receive an increase in their benefits as their expenses rise. This is especially helpful in seniors’ later years when their investments may be depleted.
The average cost of living adjustment or COLA since 1990 has been 2.65%. There’s no other investment that provides a guaranteed lifetime income that increases as your expenses go up.
In 2015, retirees receiving Social Security benefits received a 1.7 percent increase in the amount of their monthly checks. Unfortunately, it doesn’t look like anyone who receives Social Security benefits is going to get an increase next year, as there’s talk of not instituting another COLA for 2016.
Should Social Security Recipients Get a One-Time Payment to Make Up for Low COLA in 2017?
This may be upsetting for many, but there’s a certain logic behind the COLA, why it’s used, and when it’s implemented (or not implemented). Here’s what you need to know about the COLA and how it works – and why it might not be such a bad thing if the Social Security Administration skips 2016.
The History of the COLA
Cost of living adjustments have been a near-constant for Social Security retirees since 1950. At first, there was a COLA only every few years throughout the 1950s and 1960s; then, from 1970 through 2008 there was a COLA every year except for 1973 (there were two COLAs in 1974 as recompense). There were no COLAs for 2009 and 2010, though they returned to their yearly schedule the year after. Even though the COLA changes every year, the average increase over the years has been over 2.5%.
Here are the COLAs received from 1975-2015:
| July 1975 — 8.0% July 1976 — 6.4% July 1977 — 5.9% July 1978 — 6.5% July 1979 — 9.9% July 1980 — 14.3% July 1981 — 11.2% July 1982 — 7.4% January 1984 — 3.5% January 1985 — 3.5% January 1986 — 3.1% January 1987 — 1.3% January 1988 — 4.2% January 1989 — 4.0% January 1990 — 4.7% January 1991 — 5.4% January 1992 — 3.7% January 1993 — 3.0% January 1994 — 2.6% January 1995 — 2.8% |
January 1996 — 2.6% January 1997 — 2.9% January 1998 — 2.1% January 1999 — 1.3% January 2000 — 2.5% January 2001 — 3.5% January 2002 — 2.6% January 2003 — 1.4% January 2004 — 2.1% January 2005 — 2.7% January 2006 — 4.1% January 2007 — 3.3% January 2008 — 2.3% January 2009 — 5.8% January 2010 — 0.0% January 2011 — 0.0% January 2012 — 3.6% January 2013 — 1.7% January 2014 — 1.5% January 2015 — 1.7% |
The amount of increase that a COLA provides in any given year is the product of the inflation rate for the previous year in order to keep up with the eroding effect inflation has on money over time. The figure that the Social Security Administration uses is known as the Consumer Price Index for Urban Wage Earners, or CPI-W, a statistic that is calculated by the Bureau of Labor Statistics for the Labor Department.
What the Lack of a COLA Means
So what happens when there is no COLA for a given year? This can only happen if inflation remains flat according to the CPI-W. This year, according to a recent report from the Social Security Trustees, the volatility in the oil market has led to living costs fluctuating wildly; these fluctuations are expected to even out by the third quarter of this year, which is when the CPI-W is calculated for 2015 and compared to the previous year’s results. In other words, if there’s no discernible increase in inflation there’s no need for a COLA for the coming year.
This of course doesn’t take into account several things, as there could end up being a COLA for the coming year if inflation suddenly balloons by the end of the year. Additionally, Social Security officials are already predicting a COLA for 2017. According to the most recent trustees report, the COLA is expected to average 2.7% for the next few years.
The lack of any COLA for the coming year is likely to be met with anger and frustration with retirees that rely on their Social Security benefits to help make ends meet, and with 2016 being an election year this could easily result in Social Security becoming a major campaign platform for the coming year’s presidential candidates.
Even so, many experts have pointed out that when compared to the rate of return on other investments, the average cost of living adjustment for individuals over the course of their retirement is likely to be around 2.8 percent. This represents one of the best returns on investment that you’re likely to find anywhere – and this could easily soften the blow for people that feel that their Social Security benefits aren’t providing them enough financial support to make it through their golden years.
The “Hold Harmless” Rule
While Social Security benefits aren’t expected to go up next year, Medicare premiums could go up as much as 52 percent for some people according to Medicare trustees. So what happens when there is no COLA but Medicare premiums are expected to go up?
Thankfully, for people who are already collecting Social Security there is a “hold harmless” rule. This rule basically says that a person’s Social Security check cannot be reduced from one year to the next because of rising Medicare premiums. So people who are already receiving Social Security in 2015 will not see their checks go down in 2016 even though Medicare premiums will be going up.
However, people who will begin collecting benefits in 2016 will have to pay the higher Medicare premiums. For people who planned to apply for benefits in 2016, this may be incentive to apply before the end of 2015 instead.
Regardless of whether there is a COLA for 2016 or not, this highlights the importance of investing towards the future and creating a solid retirement plan that relies on more than just Social Security.
Jerry Katz says
Well, interesting read, especially since I plan to join the ranks of those receiving the benefit next year! Thanks!
Bill says
Average rate of return last 10 years in the S&P was 7.2%. You’d be a fool to invest your retirement dollars with the government, but we all have to at the point of a gun carried by the Federal government. 🙁
kristine says
Hi Bill. Thanks for the comment, however you are comparing apples to oranges. Social Security is a guaranteed lifetime income stream. A 2.7% increase on that income each year is huge. 7.2% on your investments is nice, but unless you have a very large nest egg, the risk that you will run out of money during your lifetime is high, especially if you live longer than average, we have high inflation or low rates of return. I understand that people are wary of big government and Social Security, but if you really take a minute to think about it, you’ll realize how valuable a guaranteed lifetime income that goes up as your expenses go up is.
webly says
I saw my ex mother-in-law stop receiving a SSI check. It became a huge burden over her children because she lost it right when she became very ill. Having another plan besides SSI is a good plan.
Scott the South Florida Savings Guy says
Lots of new information for me! Thanks for being on top of this and sharing!!!
Socially Nina says
Learned something new. Thank you
Avil Beckford says
Thanks Kristine! Great and useful information!
Betty Wills says
This is so scary ! No increase and power co. Just announced 17% increase. I guess they are saving for new comers to USA. They need to take some from Obama and gov. Officials and all they send to foreign countries and pay SS in which people have worked all their life for !! SUCK U.S.A. There will be war right here if they don’t stop this crap !!!!!?????!!!!
Carol Rundle says
I’m sure many people get upset about a no COLA year because they have the unrealistic expectation that they will get it every year. Good article explaining how it works.
Judy Black says
I wasn’t aware of the ‘hold harmless’ rule. Interesting and good to know. Thanks so much for the helpful information.
Roslyn Tanner Evans says
I really wish the COLA was more significant after tax deductions. It often has only increased my net by a few dollars. Not enough to really make a difference. Great that you are explaining all of the ins & outs of SS.
Alza Armstrong says
Impossible, the politicians will find a way to block it such as the interest rate being zip on CDs which we save for retirement cutting our income.
Lisa Mason says
Interesting. Thank you so much for explaining all of this. I always learn from your posts.
Bill says
I would think expenses would decrease as one gets older. After age 75 or so, even younger for a whole lot of folks, travel winds down, mortgage goes away, and a person just isn’t that active any longer, thus spending less money. My previous comment left out a very important point to be made. I left out an employer’s “contribution” toward the employee’s social security account. Having maxed out “contributions” toward soc sec on my part and my employer’s part I shudder to think how large my “nest egg” would have been with a 7% average rate of return since I began working during my high school years. Sure social security is “guaranteed”, (not really), the paltry COLA one might receive pales in comparison to the returns one can easily get outside of government programs. Means testing is just around the corner. They’ll probably call it by a different name but the result will be the same.
kristine says
“I would think expenses would decrease as one gets older.” – Not necessarily, people may be less active but their medical bills tend to increase faster than their other bills go down. Also I was talking specifically about inflation. Inflation may be low now (depending on which measurement you are looking at), but rising prices is still one of the greatest challenges that retiree face. That’s what makes the COLA so valuable.
I understand your point about how if you had invested the money you contributed to Social Security could have resulted in a much larger nest egg than the equivalent benefit you will receive from Social Security, but this goes back to the whole privatization debate. How many people would have actually saved the money if they had the choice? Also, how would they have invested their money? If you invested it in the stock market over the last seven years you would have done great, but if you made poor investment decisions, timed the market, were too conservative, etc. you could have done far worse than Social Security.
You may be one of the exceptions, but based on current savings rates in America, how often people invest based on emotions, etc., I think the majority of people are far better off with Social Security than if they had invested their Social Security contributions themselves (or failed to invest that money if they weren’t forced to). The bottom line is that Social Security is a very valuable benefit for millions of Americans and the annual cost of living adjustment allows them to keep up with rising prices when they are most vulnerable (i.e., elderly and unable to work).
Coach Natalie Palombi says
I really am glad that I found this blog, Kristine! You have helped me understand more about SS than I ever did before!
Kristen Wilson says
Yea, it’s just crazy.. the COLA keeps increasing all across the board, but incomes aren’t and companies are cutting corners. Let’s not even get into how the govt keeps spending more and our “budget” is getting farther and farther behind. I’m glad I won’t be here in 60 years, I feel sorry for my kids and their kids, our world is going to the shitter. Thanks for a great post.
Jackie Harder says
Social Security is a good thing. Having a viable retirement plan outside of government programs is even better. Thanks for the heads-up on the 2016 information.