If you opened all of your mail from Social Security this past fall, you might already know that the administration will not be issuing a cost of living adjustment (COLA) for beneficiaries in 2016. On the other hand, if you haven't yet claimed your benefits this might come as surprising news.
Doesn't Social Security raise benefit checks at the beginning of each year? That is almost always true in January of each year. However, 2016 will mark the third time in history that Social Security did not issue a COLA.
Contrary to popular belief, COLA is not automatically granted each year. These small raises in benefit checks are meant to offset inflation, helping retirees cope with rising prices of necessities like food, housing, and gas. But since the Social Security Administration determines each year's COLA by looking at the Consumer Price Index, there are no raises in checks when the inflation rate remains flat.
How does this impact me? Using the Consumer Price Index to determine cost of living adjustments has long been a hotly contested issue. The Index measures prices on various goods and services, but it gives heavy weight to the price of gasoline. Since the price of gas dropped significantly during 2015, the overall measure of inflation was impacted. However, some experts believe that the Consumer Price Index is not an accurate reflection of the cost of living faced by retirees, because the retired population depends less on gas and consumes more resources such as health care. In other words, it's possible that the formula used by the Index does not accurately measure spending by retirees.
For example, the cost of health care rose by about 7 percent in 2015, and about 30 percent of Medicare recipients will pay higher premiums in 2016. Many older people will indeed spend more on their health care in 2016, but the drop in gas prices won't benefit those who no longer commute to work every day.
It's not just Social Security. Many pension plans base their cost of living raises upon the COLA issued by Social Security. So in years that retirees don't receive a raise on their Social Security checks, many also might not receive a raise on their pension checks.
What you can do. Whether you're preparing for retirement, or you're already retired, always remember that Social Security was meant to be a supplement to another form of retirement income. In most years, beneficiaries do receive a COLA, and these small incremental raises do help to offset the rise in spending. But it's better to create a diversified and secure form of retirement income so that you don't have to depend too heavily on Social Security. For more information on retirement planning, call our office to schedule an appointment.
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