Social Security COLA Could Be 0% For Next Few Years

Social Security recipients received one of the highest increases in their retirement benefits since the 1980s.  Too bad that increase may have to last them a few years.

If you are retired and receiving Social Security benefits, you know that your benefits are increased each year to help you keep up with inflation. This is called a cost of living adjustment, or COLA.

The COLA is announced in October of each year and is based on the CPI-W (the Consumer Price Index for Urban Wage Earners and Clerical Workers) from the 3rd quarter of the previous year to the 3rd quarter of the current year.

Changes announced in October go into effect in January of the next year.

In 2009, retirees saw their benefits increase by 5.8%, due mainly to the high cost of gas during 2008. This was much higher than normal, with the average increase being around 2.8%.

Unfortunately, the Congressional Budget Office (CBO) is estimating that there will be no increase in Social Security benefits for the years 2010 through 2012.

The reason that there may not be any COLAs for the next few years is a law that says that no further COLAs may be given until the CPI-W exceeds the level on which the previous adjustment was based.

Since gas prices have gone back down, the CPI-W has also decreased and is not expected to get back to the level it was at (when the 2009 COLA was announced) until the year 2011.

Most people underestimate the impact that Social Security retirement benefits will have on their retirement. Social Security has several unique features that you can't buy in other financial products, including:

Guaranteed Income: Once you start collecting benefits, they're yours for life. It's possible that benefits will be reduced in the future as Social Security is reformed, but it’s not likely that retirees who are already collecting benefits will see a reduction in benefits.

Lifetime Income: One of the greatest benefits of Social Security is that it is for life. Even if you live to age 105, you will still receive benefits. There are very few financial products (other than pensions) that offer benefits for life.

Inflation Adjusted: Another huge benefit of Social Security is the cost of living adjustment (COLA). Benefits are increased each year based on the increase in the Consumer Price Index for the previous year. This helps retirees keep up with rising costs during retirement. While there are a few annuities that offer inflation protection, most pension plans do not offer this feature.

Survivor and Family Benefits: Often overlooked is the fact that survivors and minor children may qualify for benefits after a spouse’s or parent’s death.

Social Security recipients noticed something else rising besides just their benefits... Medicare Part B premiums have also been on the rise. 

But there is good news for people who have their premiums deducted directly from their Social Security benefits. 

There is a provision called "hold harmless" that protects most recipients from having their benefits decline if Medicare premiums rise faster than benefit increases.  That means that even if Medicare premiums increase faster than your retirement benefits, your Social Security check will not go down.

However, the "hold harmless" provision does not apply to new Social Security recipients, Medicare participants who are not yet receiving Social Security benefits and high income people. 

If you happen to fall into one of these groups you'll see higher Medicare premiums to make up for the participants who are covered under the "hold harmless" provision.  While this may not be fair, it wasn't exactly the intent when the "hold harmless" rule was created. 

However, it was also never expected that Social Security benefits would not receive a cost of living adjustment either (COLAs were made automatic in 1975).

The reason high income earners will see higher Medicare premiums is due to the Medicare Modernization Act, which will be completely phased-in this year. 

This act basically says that high income beneficiaries will pay a larger portion of the cost of Medicare, based on their income.  While this act is not the focus of this article, the combination of the Medicare Modernization Act with no COLAs for Social Security retirement benefits could mean smaller Social Security checks for people above certain income levels for the next few years.

Bottom line, if you're collecting Social Security you're going to learn the true meaning of "fixed income" over the next few years.  The best way to prepare is to watch your spending and to try to build up a cushion for the next few years if possible. 

High income earners should also coordinate their tax and financial planning strategies to avoid a spike in income which could then trigger higher Medicare premiums. These strategies need to be carefully planned and coordinated so that your increase in Medicare costs don't outweigh the benefits of the planning strategies.