Image: Social Security Disability Income Help via Facebook.
The Social Security program is one of the most important sources of income for millions of Americans retirees, with a huge proportion of recipients relying on their benefit payments for the bulk of their retirement cash flow. Earlier this month, Social Security issued the bad news that there'd be no cost of living adjustment for 2016, leaving recipients without any boost to their monthly checks. As much outcry as that announcement has already generated, though, what retirees need to consider is that given current trends, it's likely that any cost of living adjustment for 2017 might well be subpar as well.
Continue Reading Below
Why your Social Security increase disappeared for 2016As I warned several months ago, the numbers that the Social Security Administration uses to index the benefits it pays to the rate of inflation are transparent and easy to understand. Every year, the SSA figures out a cost of living adjustment that goes into effect beginning with January payments. To do so, the SSA looks at specific measures of the Consumer Price Index over the summer months and compares the average to the corresponding average during the same period in the previous year. If the average goes up, then the percentage by which it rises is that year's cost of living adjustment. If it stays flat or goes down, then there's no cost of living adjustment in the following year.
When September's CPI figures came out earlier this month, it took all the guesswork out of what 2016's cost of living adjustment would be: zero. Specifically, the CPI-W fell another 0.3% from August's figures, which had already been trending below the levels seen during the summer of 2014. In the end, the average CPI-W value for the three-month period this year was 233.278. That compares to the 234.242 figure from 2014, and since the 2015 average was less, Social Security benefits will remain unchanged next year.
The problem aheadObviously, the fact that Social Security benefits won't rise from a cost of living adjustment in 2016 is bad news for retirees who rely on their monthly checks for a big part of their overall income. Many have argued that the CPI-W doesn't accurately reflect the costs that retirees have to bear, and even with inflation apparently in check according to official government figures, many retirees report increases in the costs of the things that they need the most.
Yet what many people don't realize is that the bad news for the 2016 COLA calculation will also carry forward to hold back any potential increase in 2017's cost of living adjustment. The reason is that in calculating the cost of living adjustment next year, the law governing the SSA will require it to compare the three-month average figure with the average for the same three months of "the last year in which a COLA became effective." In other words, when it comes time to calculate the cost of living adjustment for 2017, the summer 2016 months will be compared not to the lower average of 233.278 for 2015 but rather the higher 234.242 average in 2014.
That might not sound like much, but given how low government inflation figures have been lately, it could be enough to make a big difference. The carried-forward 2014 figure essentially amounts to a 0.4% decline last year that will have to be made up in 2016 before any upward cost of living adjustment can occur. Thus, if inflation rises by 1.6% between summer 2015 and summer 2016 -- a reasonable assumption, given the range of cost of living adjustments for 2013 to 2015 of between 1.5% and 1.7% -- then the actual cost of living adjustment for 2017 would be just 1.2%, or an increase of just three-quarters of what it would ordinarily be.
Is there any silver lining?For retirees, a lack of cost of living adjustment can involve tightening belts further. Yet there are some positives. For those Social Security recipients who are enrolled in Medicare and have their premiums taken directly from their benefit checks, planned increases in premiums for Part B medical coverage will not take effect because of hold-harmless provisions that limit such increases to the rate of a cost of living adjustment. Also, for those who haven't yet retired, the wage base on which workers have to pay Social Security payroll taxes will also remain unchanged in 2016 at $118,500, compared to the $1,500 increase in 2015.
Nevertheless, many believe that Social Security recipients deserve an increase regardless of the COLA calculation. Some lawmakers have proposed legislation that would boost benefits, citing the fact that falling gasoline prices have been a primary cause for the drop in the CPI but don't help senior citizens as much as those who are working and have greater transportation needs.
Regardless of what happens in Congress, those who are getting Social Security need to keep their eyes on inflation figures. Given the ongoing lack of any inflationary pressure, it's entirely possible that at least based on the current method that the SSA has to follow, any cost of living adjustment for 2017 could be less than retirees would like to see.
The article Don't Expect a Big Social Security Increase in 2017, Either originally appeared on Fool.com.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.