The Social Security Administration announced a cost-of-living adjustment of 2% for 2018. But is that enough to outpace rising costs in retirement?
If you’re on Social Security, you’re getting a bigger cost-of-living adjustment than last year. But that’s a bit of a double-edged sword, because it means you’re paying more for goods and services in general.
Each year, the government uses Consumer Price Index data to calculate whether there will be a cost-of-living adjustment, or COLA—not to be confused with a soft drink—and, if so, how much it will be.
This year, the change in Social Security benefits is an increase of 2%, up from the 2017 COLA of 0.3%. The government estimates the average monthly Social Security benefits payable in January 2018 will jump to $1,404 from $1,377.
The 2% increase will begin with benefits payable this month to more than 61 million Social Security beneficiaries, according to the Social Security Administration (SSA).
Of course, the increase comes because prices for goods and services are also on the rise. The Social Security cost-of-living change is based on something called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the Bureau of Labor Statistics. This year’s COLA was based on a 2% increase in the CPI-W from the third quarter of 2016 to the third quarter of last year.
For many people in retirement, there’s a problem with the CPI-W method, said AARP Legislative Counsel David Certner.
The CPI-W is based on spending by wage earners, not by people in retirement.
“There would be a difference in what they spend their money on,” Certner said. “Health care tends to go up a lot faster than general inflation. It’s a much bigger component on average for a senior.”
To calculate the Social Security COLA each year, he would rather see the government use an experimental price index for Americans who are 62 years old or older called the “Consumer Price Index for the Elderly” (CPI-E), which tends to grow faster than the CPI-W.
“Most seniors would say the Social Security COLA is not keeping up with their cost-of-living increases,” he said.
There are limitations to using even the CPI-E to calculate yearly Social Security COLAs. Many Social Security beneficiaries are younger than 62, and there are people 62 or older who don’t receive Social Security benefits.
“An index designed specifically to measure price changes for Social Security beneficiaries—i.e., one that excludes older people not receiving benefits but includes younger persons receiving survival and disability benefits—might well show price movements that differ significantly from those of the experimental index,” according to the BLS.
Whether or not there may be a better alternative to the CPI-W in measuring retiree costs, and thus in calculating the COLA, one fact remains: In 2018 the COLA is 2%.
The COLA may be of particular interest to many retirees for whom Social Security is their major source of income. According to government figures:
So that 2% cost-of-living increase is important for a lot of people.
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