Social Security recently announced a 2.0% cost of living adjustment (COLA) for the upcoming year of 2018. This is a much higher increase than past years, thankfully.
It brings up the question of whether Social Security COLAs truly will help retirees keep up with future increases in costs.
The change in COLA is measured by a form of the Consumer Price Index that tracks a basket of common goods and services. Unfortunately, it does not necessarily track the cost of some items that can go up substantially for retirees, such as medical care.
Another key factor is what Social Security recipients experience in terms of the actual dollar increase each year after increases in Medicare premiums are also factored in. Since Medicare premiums are deducted from Social Security checks, increases in Medicare can offset some of the real COLA awarded. The facts are that Medicare increases have substantially outpaced increases in Social Security income.
How does that change planning for the future for the retiree?
First, in your planning assumptions, you may want to use a more conservative annual Social Security COLA. Although the Social Security trustees project future average COLAs above 2.5%, we only use 1.5% average COLA in all our planning assumptions.
Second, it highlights the value of delaying claiming Social Security, especially for the primary income earner. The higher the Social Security benefit, the more that annual COLAs will compound the actual dollar increase amount over the years. Smaller benefits increase at a slower dollar rate, and higher benefit amounts increase at a higher dollar rate.
Of course, it is nice that COLAs are even provided to Social Security income. They were not originally in 1940 and it was not until 1972 that they were codified into law. These increases are a tremendous benefit that add to your future retirement security.
If you have any questions feel free to contact me