Social Security COLA: When an Increase Isn’t an Increase

by | Oct 31, 2016 | Retirement, Social Security

I subscribe to a lot of blogs and retirement-related websites. My e-mail in-box fills daily with news and blog articles about issues that affect older adults. Over the past several days, it became clear that the 2017 Social Security cost-of-living adjustment (COLA), announced Oct. 18, was the hot topic. With that in mind, I have to say: A 0.3 percent Social Security COLA is not an increase.

What does a 0.3 percent COLA represent?

In Columbia, Missouri, where I live, the average 0.3 percent COLA might buy two gallons of gas or one tall-sized latte at Starbucks. For the average Social Security beneficiary, we’re talking about a monthly COLA of about $4.

Let’s be clear: 0.3 percent is three-tenths of one percent.

How Does the 2017 Social Security COLA Affect Retirees?

CNN reports the 0.3 percent COLA is Social Security’s smallest-ever increase, and U.S. News and World Report says it brings the average Social Security check to $1,360 in 2017. (Note that Social Security beneficiaries didn’t have a COLA in 2015 or 2016.)

The COLA in dollars depends on the size of the beneficiary’s Social Security check. For example, retirees with the highest Social Security benefits ($2,639 per month) will net a $7.92 monthly increase with the 0.3 percent COLA, according to CNN; however, CNN also offers the example of Millicent Graves in Virginia, who will see a $3.10 increase because her monthly check is just $1,033.

Understandably, Social Security beneficiaries are speaking out about the 2017 COLA and the effects they anticipate. Retirees’ actual costs of living continue to escalate despite the lack of a substantive COLA from Social Security for the past several years.

Ronni Bennett, who writes the blog “Time Goes By,” reported that her Medigap premium has gone up 4.5 percent, her internet payment (which she needs to run her blog) has increased 10 percent, and her car insurance premium has increased 5.1 percent. Thus far, Bennett says she has experienced an increase in expenses of about $35 per month. That $35 doesn’t include the increase in the Medicare Part B premium, which she anticipates will be announced next month, or the costs of other goods and services Bennett expects will increase. The $4 Social Security COLA will not make a dent in Bennett’s true cost of living.

Some beneficiaries are not persuaded by Social Security’s explanation that this year’s COLA is due to lack of inflation. Sure, gas and oil prices are lower, they say, but that’s not trickling down to older adults. Tom Sightings says on his blog, “Sightings Over 60:”

The typical reaction I’ve seen around the Internet reads something like this: ‘I worked all my life and paid Social Security taxes for almost 40 years, and now Social Security gives us virtually no increase to help us pay our bills. They say the reason is because there’s no inflation, mostly because the price of gas has gone down. Well, that’s great for truck drivers and Uber drivers. But what about the seniors who actually rely on Social Security? Food prices are going up, medical costs keep climbing, and pretty much everything else (except for gasoline which we don’t even use much anymore since we don’t commute) is more expensive than last year. What are we supposed to do?!?’

Sightings says his property taxes increased $100 over the past year – an increase of 3.5 percent, which is 10 times the rate of the Social Security COLA. In addition, his sewer tax went up $30 from last year, which was a 10 percent increase. He also was prescribed a new medication last week, and he’ll have to bear the out-of-pocket cost. All of these increased expenses add more to Sightings’ cost of living than the Social Security COLA will cover.

AARP echoes both Bennett’s and Sightings’ concerns, saying that health-care costs are a bigger proportion of older adults’ budgets, and those costs have increased more than inflation. “As prescription prices skyrocket and Medicare premiums and other health costs increase, many older Americans have understandable concerns,” says AARP.

Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare (NCPSSM), points out that the $4 per month COLA might cover the cost of one Lipitor pill, a common medication among older adults. In an Oct. 18 news release, Richtman said:

No one can say with a straight face that providing the average senior with an additional four dollars a month will come even close to covering the true cost of living that retirees face. The average senior spends more than $5,000 a year on healthcare costs alone. A $4 Social Security COLA doesn’t even make a dent in covering rising costs for seniors.

How Should the Social Security COLA Be Calculated?

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is the measure the federal government uses to calculate the Social Security COLA. Some, like Richtman, argue the CPI-W is not an effective means to measure costs of living for older adults:

I’ve asked seniors at town hall meetings around the country how many of them think the COLA represents their true cost of living – laughter is always the response. We should move to a COLA formula that takes a more accurate measure of seniors’ expenses, which is a CPI for the elderly. The CPI-E has been in the experimental phase since 1982. It’s time to finish the job by fully funding the development of a more accurate COLA formula.

The Bureau of Labor Statistics (BLS) describes the CPI-E as an experimental Consumer Price Index for the elderly, which is based on households “whose reference person or spouse is 62 years of age or older.” BLS data from 2009-2010 indicate 24 percent of all consumer units met the definitions of the CPI-E.

The BLS graph below depicts data from 2011, comparing the three CPI measures: CPI-W (in red, which is currently used to calculate the Social Security COLA), with the experimental CPI-E (in green) and the CPI-U (in blue). The BLS says the CPI-U “represents the spending habits of about 88 percent of the population of the United States.” As Richtman states, the BLS has tracked CPI-E data from 1982.

BLS cost of living

Boiling down that alphabet soup of acronyms, in short, the current measure used to calculate the Social Security COLA might not represent the true cost of living for older adults. The CPI-E – a means of calculating spending specifically among older adults – has been studied for 30 years but hasn’t been formally adopted.

Benefits of using the CPI-E include a higher weight for costs of housing and health care because these expenses are more significant for older adults than for the younger populations represented in either the CPI-W or the CPI-U. “The CPI-W gives comparatively low weight to the prices of goods and services that older Americans consume the most,” says Money magazine. “While it includes medical care, [CPI-W] also includes prices for entertainment and electronic goods, which seniors typically consume less than the typical urban worker.”

A number of advocates for older adults support CPI-E, among them AARP, the Center for Retirement Research and Richtman’s group, the NCPSSM. Some Americans are getting on the CPI-E bandwagon as well. A 2014 survey conducted by The Washington Post found that 35 percent of those surveyed favor shifting to the CPI-E as a means to fix Social Security for the long term.

But while CPI-E might reflect older adults’ spending more accurately and protect them from inflation, it could come with a risk, says The Motley Fool’s Sean Williams. “Tying the COLA to the CPI-E would help ensure inflation does not erode retirees’ benefits, and it would eliminate 20 percent of [Social Security’s] shortfall,” Williams says. “Unfortunately, using a revised CPI could hurt elderly Americans who are reliant on Social Security for a majority of their income,” he says. “Being less inclined to adjust their spending habits could be difficult if the CPI-E reduced their benefits check.”

What’s the Bottom Line on the 2017 Social Security COLA?

The bottom line might depend on who you ask. The Motley Fool’s bottom line on the 2017 COLA is that “it is a positive sign for the U.S. economy. Specifically, there was no COLA for beneficiaries last year because there was no inflation whatsoever. So, this is certainly a step in the right direction, as well as a few extra dollars in retirees’ pockets.”

Although this might be objectively true, it likely is cold comfort for Social Security beneficiaries who are staring down a laundry list of increased expenses in 2017 and for whom the COLA will be spent before they see a dime of it. “This year’s cost-of-living raise will not keep pace with the 5.1 percent increase in the cost of health care from August 2015 to August 2016, as measured by the Bureau of Labor Statistics,” says Money magazine.

Bennett’s blog has received a number of comments about the new COLA, including this from a commenter named Elizabeth Rogers, expressing concern that policymakers in Washington, D.C., aren’t acting to alleviate retirees’ true costs of living:

I didn’t anticipate feeling as financially vulnerable and insecure in my older years as I do. There are times when my mind drifts to the ‘what-ifs,’ although I don’t stay there long. What if the landlord of our manufactured home community decides to sell his land to a billionaire developer? What if my 16-year-old SUV quits? What if there’s a health catastrophe? Although we have a good retiree healthcare plan (thank goodness!), a couple of years in any kind of ‘facility’ would pretty much wipe us out. I’m very grateful for what we have, but I SO wish CPI-E was on the radar screen in Washington, D.C. Maybe as more baby boomers age and realize how vital SS is for them in retirement, it will happen.

What Are the Presidential Candidates Proposing for Social Security and Medicare?

During the recent debates, both Social Security and Medicare have been lumped into broader discussions about the annual budget deficit. Some advocates say both candidates are short on details, and economists express concerns about whether their proposals are realistic.

Republican Donald Trump has said he would decrease business taxes and improve trade policy to grow the economy. In the last presidential debate, Trump said he believes his proposals could result in GDP growth of 5 or 6 percent. However, Money magazine points out, “Few independent economists think Trump’s projections are realistic,” and Moody’s Analytics indicates Trump’s proposal could have the opposite effect that he envisions – shrinking the economy instead of stimulating growth.

Democrat Hillary Clinton, on the other hand, says she would raise taxes on the wealthy and increase the upper income limit for taxes on Social Security, but she hasn’t offered specifics about that limit. While she says she wants “the wealthy and corporations to pay their fair share,” Money magazine says Clinton’s approach might not be realistic either. “That’s because increasing taxes on the wealthy alone might not raise enough money to both address the nation’s budget problems and allow her to move forward with her other priorities …”

What Can Retirees Do?

The 0.3 percent Social Security COLA is official, and policymakers haven’t accepted CPI-E or made changes in Social Security for the long term. USA Today recommends two strategies to help retirees cope with the effects of inflation and a lower cost of living, despite the Social Security COLA:

  • Increase your income. “Rejigger your assets, and go back to work,” says USA Today.
    • Balance your assets with a strategy called “account and asset location.” Consider the types of assets you have and the types of retirement accounts that are available. It’s important to put the right assets in the right accounts, says USA Today, because it may increase your after-tax income.
    • Find part-time employment to offset the income loss. Joining the “gig economy” through Lyft, Uber or Airbnb could provide additional income.
  • Reduce your expenses. “The big budget-busters for retirees are housing, which represents about one-third of expenses, and health care, which represents about 15 percent of expenses,” says USA Today.
    • Decrease housing expenses by downsizing or using government-sponsored home equity conversion mortgages (HECMs).
    • Reduce health-care costs by reviewing plans and options during Medicare open enrollment. Coverage for prescription drugs could result in savings as could a shift from traditional Medicare (Part A, Part B and Part D) to a Medicare Advantage plan. Medicare open enrollment ends Dec. 7, 2016.
    • Consider that funds from Roth IRAs and HECMs will not affect Medicare premiums, says USA Today, and this could be factored into a long-term retirement planning strategy.

What do you think about the Social Security COLA? What strategies will you use to manage your income and expenses? What do you think our policymakers should do? Tell us in the comments!

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