The official announcement for 2018 Social Security cost of living adjustment (COLA) came out on October 13, 2017. The COLA in 2018 will be several times larger than in 2017.
Social Security COLA goes by the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). That index has increased modestly this year from a year ago. The COLA will be 2.0% in 2018.
For those still working, the Social Security Wage Base will increase from $127,200 to $128,400, which is a small increase of 0.9%.
While we are at it, I’d like to address a few common myths about the Social Security COLA.
Myth No. 1: The President or Congress sets the Social Security COLA
Some mistakenly think that the Social Security COLA is given arbitrarily by the President or Congress, and they want their elected officials to take care of the seniors by declaring a higher COLA. That’s not the case.
The calculation is automatic. It goes strictly by the inflation numbers. You get a higher COLA only if the inflation numbers are higher. How the COLA is calculated is written into the law many years ago. The current President and Congress don’t control the results.
Myth No. 2: Retirees should want a higher Social Security COLA
Intuitively people want a higher COLA. However, a higher COLA caused by a higher inflation does you no good. When there is a higher inflation, even though your Social Security benefits get a bump, your other money will lose more value. Contrary to intuition and many people’s belief, you want a lower COLA. A lower COLA means lower inflation, which means lower expenses for retirees, which makes your savings outside Social Security last longer.
Some say the government deliberately under-reports inflation. Even if that’s the case, you still want a lower COLA.
Suppose the true inflation for seniors is 5% higher than the reported inflation. If you get a 1% COLA when the true inflation is 6% and you get a 3% COLA when the true inflation is 8%, you are much better off with a lower 1% COLA together with 6% inflation than getting a 3% COLA together with 8% inflation. You’d rather your other money lose to 6% inflation than losing to 8% inflation. Your savings last longer with lower inflation.
Pray for lower inflation if you are retired.
Myth No. 3: A larger increase in Medicare Part B premium means there is no COLA
Sometimes there is an increase in Medicare Part B premium such that it completely offsets the Social Security COLA. Although there is no net increase in the amount people receive, there is still a COLA. Medicare Part B premium increases when the costs to cover the retirees’ medical expenses increase. Medicare Part B premiums only pay a small fraction of the total cost. Medical costs can increase faster than the general cost of living, especially for retirees.
Deducting the Medicare Part B premium from the Social Security check is only for efficient administration. If people pay Medicare Part B premium separately, it’s easy to see there’s COLA, then there’s increase in medical cost. The existence of one does not deny the existence of the other. In order to preserve the COLA, one can always dis-enroll from Medicare Part B, but that wouldn’t be wise.
[Photo credit: Flickr user FDR Presidential Library & Museum]