The Social Security Administration estimates that 21% of married couples and 43% of single seniors rely on Social Security for 90% or more of their income. The cost of living adjustment in 2018, 2 percent, is the largest increase in COLA since 2012. As most seniors depend on Social Security for their main source of income, this increase can determine whether they make financial ends meet in the months to come.
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“Retirees aren’t just trying to live on a ‘fixed income,’ but a shrinking one,” says Mary Johnson, Social Security policy analyst for the Senior Citizen League. Johnson discussed with Fox Business what you need to know about COLA and what to expect going forward.
Boomer: After receiving a 2 percent cost of living adjustment in 2018, why is it that 50 percent of retirees saw little or no increase in their Social Security benefits?
Johnson: In 2018, Medicare Part B premium increased to $134.00 per month (or more) for millions of Social Security recipients. This took most, if not all of the annual cost of living adjustment (COLA) for roughly half of all retirees age 65 and over.
For the majority of beneficiaries, even though the annual Social Security COLA was 2 percent this year, that did not boost benefits enough to cover the entire amount required for the monthly $134.00 Medicare Part B premium. This was primarily due to the after effects of the Social Security “hold harmless provision.”
Boomer: What is the “hold harmless” provision and what is its effect on benefit growth?
Johnson: The hold harmless provision provides valuable protection from benefit reductions when COLAs are extremely low and Medicare Part B increases are high. The provision prevents one’s Social Security benefits from being reduced when the dollar amount of the COLA increase is less than the dollar amount of the Medicare Part B premium increase. The hold harmless provision applies to people whose Part B premiums are automatically deducted from their Social Security benefits, and whose incomes are below $85,000 individual, or $170,000 for couples.
While the protection from benefit reductions is invaluable, there can still be large Medicare Part B increases to contend with later on and that’s what happened in 2018.
Here’s how it works: In 2016 inflation was so low that no COLA was payable, and the hold harmless provision was triggered. Millions of beneficiaries who were paying a monthly Part B premium of $104.90 in 2015 where held harmless. Their Part B premiums remained at $104.90 per month in 2016, even though Medicare Part B premiums rose to $121.80 for new enrollees and others, like high-income beneficiaries who are not subject to the hold harmless provision.
In 2017, there was just a 0.3% COLA. That only raised retirees’ Social Security benefits by a few dollars, but the Part B premium increased from $121.80 to $134.00. Hold harmless was triggered again. For a majority of beneficiaries all of the COLA went toward the Part B premium. Depending on the amount of their Social Security benefits, most people paid from $105 to $112.50 per month for their Part B premiums in 2017. Thus with the 2 percent COLA in 2018, the Part B increase to $134 per month was so large that for 50 percent of Social Security recipients, premiums took the entire COLA again in 2018.
The Senior Citizens League recently released a forecast that this situation could finally change in 2019. According to consumer price index data through April, the 2019 COLA could be around 3 percent, which would raise average Social Security benefit of $1,300 about $39 per month. And recently the Medicare Trustees estimated that the 2019 Medicare Part B premium would only increase about $1.50 to $135.50 per month. That would mean most Social Security recipients might finally see some growth in their Social Security benefits in 2019 after three years of benefits remaining flat.
The flip side to that is that prices are still rising several times faster than the COLA.
Boomer: What can retirees living on a fixed income do to maintain their retirement finances?
Johnson: The Senior Citizens League has been studying costs of retiree households for the past 8 years. Our annual study of 39 typical senior costs indicates that medical and housing costs are the two fastest growing categories of expenditures for people age 65 and up. In 2018, food is another challenging category. To be able to handle rising costs in retirement here are a few things to consider:
Don’t retire too soon. Unless you are terminally ill and only have a few months to live, you could wind up leaving tens thousands of dollars in retirement income on the table if you retire prior to your full retirement age. Most people don’t know what their full retirement even is —66, 67? Even fewer people understand the value of delayed retirement credits, and what that could mean in lifetime income. Your Social Security benefits grow 8 percent for each year you delay starting benefits after your full retirement age up to age 70. The Social Security has a retirement age calculator to help you get started.
Keep working or pick up a part-time job, even if you have some retirement savings. It’s important to diversify your income stream in retirement and Social Security alone is unlikely to support you. While you can work and receive Social Security benefits at the same time, if you are below your full retirement age Social Security has earnings restriction rules that can reduce the amount of benefits you would receive. This is another reason to put off starting benefits too soon.
Downsize your lifestyle and continue to contribute to retirement plans, like a Roth, even after age 70 ½. Tax rules require you to start taking minimum required distributions from traditional 401(k)s and IRAs April 15th of the year after you turn 70 ½. However those rules don’t apply to Roth IRAs. You can continue to put away retirement savings past age 70 ½.