Every year the Social Security Administration (SSA) announces the Cost-of-Living Adjustment (COLA) for the next year. The COLA is mean to help retirees keep up with the rising costs of inflation. Most retirees can be happy that the COLA for next year will be 2.8%.
So how exactly is this adjustment calculated? The COLA is calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures changes in the cost of things like food, rent, fuel, and transportation.
Even though the 2.8% increase might not seem like a lot, there are many families living on fixed incomes and every bit counts.
Why the Raise Doesn’t Always Feel Like One
The reason why retirees don’t see much of an increase is because they spend most of their income on healthcare and housing and the cost of these are increasing constantly.
Sadly, even though Social Security benefits may increase, the increase may be offset by the rising costs of healthcare or groceries. With that being said, it may be difficult for retirees to keep up with the rising costs.
When Medicare Takes a Bite Out of the Increase
Even though Social Security has increased, Medicare premiums also increased. Most retirees have their Medicare Part B premiums taken automatically from their Social Security checks.
Your COLA increase may be reduced if Medicare rates rise, as they frequently do. For instance, you will only see an increase of $30 in your pocket if your Social Security payout increases by $50 per month but your Medicare cost increases by $20.
This is why retirees should check their net benefit amount, to see what they actually get after deductions.
How to Check Your New Payment
You can log onto your online Social Security account and check your benefits; you do not need to wait for mail.
Once you’re logged in, you can view:
- Your new benefit before deductions)
- The Medicare premium taken out
- Your net payment
This will assist you in understanding how your payments work.
How to Make the Most of Your COLA
Even a small increase can help if you use it wisely. Here are a few simple ways to stretch your new benefit:
- Go through your Medicare plan and make sure you are not paying any unnecessary fees.
- Go through your living budget and see if there are any expenses which you can mitigate.
- Track your monthly spending.
- Where possible, delay making withdrawals to avoid any unnecessary charges.
Why the COLA Formula May Need a Rethink
Unfortunately, there are many experts who noted that the COLA does not reflect the accurate spending of the elderly population. The CPI-W index tracks the spending of working-class individuals and not retirees.
The SSA is more likely to get an accurate estimate of the spending pattern of retirees by using the CPI-E (Consumer Price Index for the Elderly). This index focuses on seniors’ actual expenses and could result in slightly larger annual increases. This helps retirees keep up with real life cost of living.
Bottom Line: Helpful, But Not a Game Changer
Yes, indeed the 2.8% COLA is good news because every little bit counts. However, it’s important for retirees to plan ahead and budget accordingly so that they are able to account for their essential expenses.
Make sure you understand how your benefits work as well as what will be deducted from your benefits. it’s important to stay informed, make adjustments to your budgets where possible and plan ahead.
Millions rely on Social Security and it’s important to understand how benefits work to maximise it. If you need assistance making financial decisions, be sure to consult with a financial advisor.