- Social Security’s 2018 cost of living adjustment will be the largest in six years
- For many, higher Social Security benefits will be offset by increased costs for Medicare
- The Social Security system faces long-term challenges, but may be healthier than you think
In recent years, Social Security recipients have had to settle for little or no increase in benefits. The good news for 2018 is that inflation jumped in the third quarter this year, which will lead to a cost-of-living adjustment (COLA). Social Security’s annual COLA reflects the change in the inflation rate between the third quarter of 2017 and the third quarter of 2016. This year, hurricane activity boosted gasoline prices, pushing overall inflation higher just in time to boost 2018 Social Security benefits by 2% over current levels.1
For the average Social Security recipient, the increase equates to an added $27 per month (about $329 per year), which is modest, but still the largest increase in six years. Weak inflation amid a slow economic recovery has weighed on this annual adjustment. In fact, there was no increase in Social Security benefits at all in three of the last eight years (2010, 2011 and 2016).
Social Security giveth. Medicare taketh away?
Unfortunately, some Social Security recipients may not see the inflation increase in their monthly check. Those who participate in the Medicare Part B program are subject to a “catch-up” provision in that program’s cost. That means higher Medicare Part B premiums will, for many, wipe out their Social Security benefit hike.
Last year, Social Security benefits did not increase. As a result, recipients that had Medicare Part B costs taken out of their Social Security check were “held harmless” (as required under law) from the higher Medicare cost as implementing it would have resulted in a net decline in their monthly check.
Will Social Security remain over the long term?
Reports of Social Security’s impending demise tend to be overdone. It is true that adjustments to the program – either benefit cuts or tax increases or a combination of the two – will be necessary to keep it fully funded over the long term.
For now, the Social Security program may be healthier than most people realize.
Social Security payments are based in part on the health of the Social Security Trust Fund, which reported $2.85 trillion in assets at the end of 2016. The assets largely consist of special bonds issued to the program from the U.S. Treasury Department. Data from the Social Security Administration shows that payments to recipients outweighed payroll contributions last year, but $88 billion in interest from these special bonds allowed the Trust Fund to actually expand its asset base by $35 billion.
According to Trust Fund Administrators, projected benefits can be paid in full through 2034, at which time trust fund reserves will become exhausted. Under current law, Social Security payments must then conform to the level of related tax receipts coming in from worker payroll deductions.
Government actuaries project Social Security taxes at that point will cover 77% of benefits. Thus, Congress will need to make adjustments to the program before this point, or all recipients will experience a corresponding 23% cut in their monthly check after the year 2034.
Important planning considerations for current and future retirees
Social Security and Medicare benefits are only two of several factors investors must consider in retirement. Keep in mind that Social Security is only meant to supplement income from other retirement sources, and Medicare coverage gives you a wide range of options to consider.
Social Security and Medicare can be challenging to navigate – especially for those who are not yet enrolled. Talk to your financial advisor to better determine how Social Security and Medicare can be effectively incorporated into your broader retirement plan.
1 Department of Labor