4 Things Most People Get Wrong About Social Security COLAs

Social Security is one of the most important benefits for
seniors available today. And a lot of retirees end up collecting those
benefits for many years. That’s why Social Security’s cost-of-living
adjustments, or COLAs, are so important to seniors’ income.

The purpose of COLAs is to help Social Security benefits keep pace with
inflation. Before 1975, Social Security benefit increases had to be voted in by
lawmakers on a case-by-case basis. Since then, benefits have been eligible for
an automatic inflation adjustment each year.

Whether you rely on Social Security COLAs today or expect to in the future, it’s
important to understand how they work. Here are four things you may not have
known about COLAs, but should.

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1. They’re not based on senior-specific expenses

You might assume that Social Security COLAs are calculated based on
senior-specific cost increases. But Social Security COLAs are actually based on
data from the Consumer Price Index for Urban Wage Earners and Clerical Workers,
or CPI-W.

As the name implies, the CPI-W does not focus on the costs seniors
incur. Rather, it focuses on the costs wage-earners incur. That’s caused Social
Security benefits to lose buying power through the years.

The Senior Citizens League estimates that Social Security benefits have lost
13.7% of their buying power since 2016. And insufficient COLAs are largely to
blame for that. Advocates have pushed to change the COLA formula to an index
that measures costs retirees face, like the Consumer Price Index for the
Elderly, or CPI-E, for this reason.

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2. They’re based on third quarter inflation data only

If you’re someone who follows the news on Social Security, you’ll commonly see
COLA estimates pop up every month following a CPI-W release. But while those
estimates may offer clues on what to expect in the new year, they’re speculative
for the most part.

Social Security COLAs are specifically based on CPI-W data from the third
quarter of the year. So it’s only data from July, August, and September that go
into that calculation. The Social Security Administration typically announces an
official COLA in October, once September’s data becomes available. Any number
you see before then should be regarded as a projection only.

3. There’s no such thing as a negative COLA

Social Security COLAs are tied to the CPI-W directly, but that doesn’t mean
benefits are guaranteed to increase each year. When inflation stays flat or
decreases, there can be a 0% COLA. In fact, since COLAs became automatic, there
have been three separate years when no raise was given to Social Security
recipients.

The good news, though, is that there’s no such thing as a negative
Social Security COLA. Benefits cannot go down from year to year even if there’s
a decrease in inflation. In that situation, benefits just stay where they are.

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4. They can be wiped out by Medicare Part B increases

Older Americans who are signed up for Social Security and Medicare at the same
time pay their Part B premiums out of their monthly benefits. What this means is
that if there’s a small COLA the same year there’s a large Part B increase, that
Part B hike could wipe out the COLA completely.

For example, say there’s a year with just a 1% COLA. On a $2,084
monthly benefit, which is the average today for retirees, that’s an increase of
$20.84. But if the cost of Part B increases by $21, it leaves seniors with a
$2,084 benefit with no COLA. And while a $21 Part B increase is high,
in 2026, the cost rose by $17.90 — so $21 isn’t out of the question.

Thankfully, the most a Medicare Part B increase can do is cancel out a COLA.
Seniors are protected from seeing their Social Security benefits decrease from
one year to the next due to a Part B increase.

Bottom line

While COLAs are an important part of Social Security, it’s important to
understand that they’re only meant to match inflation, not get ahead of it. And
based on the Senior Citizens League’s findings, they often fall short in that
regard.

If you’re struggling to cover your retirement expenses on Social Security, you
may want to look at other ways to boost a fixed income. Going back to work
part-time could help put more money in your pocket and make it easier to pay
your bills.

It’s also worth making sure your retirement savings are set up to generate
income. If your nest egg is sitting in cash, it may be time to start investing in
assets that can pay you on a regular basis, like bonds and dividend stocks.
Doing that could take some of the pressure off of your Social Security checks
and help make up for years when COLAs aren’t so generous.

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