Each year the Social Security Administration (SSA) looks at data and decides whether a benefit increase will be applied to keep up with inflation. How well that happens is debatable, but for many it certainly doesn’t seem realistic.
The SSA recently announced the 2017 cost-of-living adjustment (COLA) increase for Social Security recipients will be 0.3 percent. This slight increase could impact your income next year. Before we get into considerations, keep in mind Social Security has had small increases in cost of living before.
Last year Social Security had a 0 percent increase, as it did in 2010 and 2009.
The cost-of-living increases since 1975 have been based upon the Consumer Price Index for Urban Wage Earners and Clerical Works; better known as the CPI-W index. Each year the Social Security COLA is increased based on the CPI-W from the third quarter of the prior year to the corresponding quarter of the current year.
As Social Security beneficiaries begin receiving their increase, consider these points:
- The CPI-W might only show inflation at 0.3 percent, but your personal expenses might be going up more. Especially, if your expenses are heavily dependent on health care. Understanding how this impacts your net income is important. And it may be the right time to talk with someone about your income distribution plan for next year.
- With a small 2017 increase, beneficiaries on Social Security can’t have their Social Security net benefit decreased. This net benefit is what you receive after paying for your Medicare benefits (if you’re on Medicare Part A and Part B). By law, there’s a hold harmless provision that can’t decrease any Social Security beneficiary’s net benefit. This is good news for individuals from an income standpoint.
- The bad news: Some Medicare beneficiaries may see a higher increase in their Medicare premiums. Medicare Part B and Part D are required by law to meet 25 percent of their anticipated annual expenses each year from Medicare premiums. If Medicare can’t reach this percentage because of the hold harmless provision in Social Security, Medicare will increase premiums for new Medicare beneficiaries in 2017. And premiums will also increase for Medicare beneficiaries that have a modified adjusted grow income of more than $85,000 for those who file individually on their taxes or $170,000 for individuals that file married filing jointly. Right now, without Congressional action, these Medicare recipients will see roughly a 20 percent increase in their premiums from 2016 to 2017.
Social Security and Medicare make up a large percentage of retirees’ income and expenses. Understanding the impact COLA may have on retirement plans is important. That’s why it’s always prudent to talk with someone about how this affects your individual circumstances.
Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc.