To say that this has been a topsy-turvy year for America's most important social program would be a bit of an understatement.
Benefit cuts may be in the offing...
Continue Reading Below
In early June, the Social Security Board of Trustees released its annual report that examines the long-term (75-year) outlook and health of the program. Contained within was a forecast that most folks saw coming but expected to be years away.
Beginning in 2018 and continuing for each subsequent year, the program is projected to expend more than it collects in revenue. Even though this net cash outflow will start off relatively small -- $1.7 billion in 2018 and $0.2 billion in 2019 -- it's expected to grow rapidly in 2020 and beyond.
By 2034, the nearly $2.9 trillion in excess cash that the program has built up since inception is forecast to be completely depleted. If Congress fails to take action by raising additional revenue and/or cutting expenditures, the report cites the need for an across-the-board cut to benefits of up to 21% to sustain payouts through the year 2092. Considering that 62% of current retired workers rely on their monthly Social Security payout for at least half of their income, a reduction of this magnitude could prove devastating and send elderly poverty rates soaring.
That's one side of the coin -- now here's the other.
... but a benefit increase is on the horizon in less than four weeks
On October 11, the Bureau of Labor Statistics (BLS) released its inflation data for the month of September, providing the Social Security Administration (SSA) with the last data point needed to calculate the annual cost-of-living adjustment (COLA) for the more than 62 million existing beneficiaries.
As a refresher, Social Security's annual COLA was introduced in 1975 to track the inflation that program beneficiaries face as closely as possible, and therefore pass along a benefit "raise" each year that's commensurate with this inflation. This is done by tracking the average reading of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) during the third quarter (July through September) in the current and previous years. If the average reading rises year over year, then beneficiaries receive a "raise" that's commensurate with the percentage increase, rounded to the nearest 0.1%.
Since 2010, Social Security's COLA has come in at 0% three times, with the smallest increase on record in 2017 of 0.3%. A reading of 0% means that the basket of goods and services measured by the CPI-W fell year over year, thereby resulting in falling prices. Although Social Security benefits can't decline during times of deflation, they don't rise, either.
As announced in October, COLA in the upcoming year will be 2.8%, which represents the highest benefit increase since 2012. With the average retired worker currently bringing home $1,419.31 a month, according to the SSA in October, a 2.8% raise represents a nearly $40 monthly raise, just shy of $477 extra per year. This benefit increase is set to go into effect in less than four weeks.
And more bad news
Unfortunately, there's some more bad news.
To begin with, not everyone is going to see this full increase in benefits. Throughout this decade, the hold-harmless clause has protected beneficiaries who are also enrolled in Medicare from having their Part B premiums rise at a faster pace (on a percentage basis) than their Social Security COLA. In essence, the hold-harmless provision ensures that Social Security benefits don't decline as the result of rapidly rising Part B premiums.
However, as Part B premium inflation has slowed and Social Security's COLA has picked up, millions upon millions of Medicare-enrolled seniors now are playing catch-up on their Part B premiums to get back to the standard rate of $135.50 in 2019. Although far fewer retired workers will be impacted in 2019, a number of lower lifetime income retired workers could see some or all of their COLA diverted to cover an increase in Part B premiums.
The other factor that could adversely impact seniors is the continued loss of purchasing power to Social Security income over time. An analysis from The Senior Citizens League found that Social Security benefits have lost 34% of their purchasing power since the year 2000. This is because the CPI-W, by definition, measures the spending habits of urban and clerical workers. And these folks spend their money very differently than senior citizens. This leads to medical care and housing expenditures receiving less weighting than they should, and other less important expenses, such as education, apparel, and entertainment, receiving more weighting.
Thus, a raise is coming for Social Security beneficiaries, but you may want to take it with a grain of salt.
The $16,728 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.