According to a new estimate based on the recent Social Security Trustees report, the Cost of Living Adjustment (COLA) for 2020 will be a scant 1.8%. That’s an increase of about $26 in monthly benefits for the average claimant. The same projection says that the Medicare Part B premium will likely rise by $8.80 per month next year. If both estimates prove accurate, the average beneficiary will only receive a net increase of $17.50 per month, which doesn’t buy much these days. As Bernice Napach reports in ThinkAdvisor:
“For recipients collecting $735 or less in benefits, the Medicare Part B premium increase would wipe out their entire COLA. They would have no additional funds to pay for rising costs for health care, housing or other necessities, which is an issue for a growing number of retirees.” – ThinkAdvisor, 5/1/19
If the 2020 COLA is, in fact, 1.2%, it would be the smallest benefit increase since 2017. (At 2.8%, the 2019 COLA was one of the highest of the past ten years.) For three of those years, the COLA was zero.
Of course, the COLA is supposed to cover the cost of inflation from year to year. But under the current formula, the CPI-W (or Consumer Price Index for Wage earners), it usually doesn’t. That’s because the CPI-W does not accurately reflect the inflation rate for the goods and services that seniors spend money on. For example, seniors spend roughly twice as much on medical care as younger adults, but the CPI-W does not take that into consideration. On the other hand, retirees don’t drive as much as working-age people, but the CPI-W fluctuates with the cost of gasoline. If the price at the pump falls, so do seniors’ COLAs.
The National Committee believes it’s time to adopt a better formula for calculating cost-of-living adjustments for retirees: the CPI-E, or Consumer Price Index for the Elderly. The CPI-E is based on retirees’ actual spending habits rather than those of the general population. Costs like food and transportation are de-emphasized, while inflation in housing and medical costs is given greater weight.
Three pieces of legislation have been introduced in the 116th Congress that would implement the CPI-E for calculating Social Security COLAs. The National Committee endorses all three:
A 2019 study released by the federal General Accounting Office (GAO) found that if COLAs had been based on the CPI-E during the years 2003–2033, by the end of that 30-year period a beneficiary who earned the average national wage would receive $100 (or more) in additional monthly benefits. An extra $100 doesn’t sound like a lot, but think of the expenses it could help cover for seniors living on fixed incomes.
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A more accurate COLA formula would increasingly benefit retirees over time: the larger the benefit this year, the higher it will be the next year when the percentage increase in the COLA is applied. (This is known as a ‘compounding effect.’) Conversely, inadequate cost-of-living adjustments – especially when offset by increases in Medicare premiums – erode seniors’ buying power over time. There is no question: the CPI-E represents a superior alternative for seniors, especially the 50% of retirees who depend on Social Security for all or most of their income.