How Social Security Calculates C.O.L.A

Each fall, more than 60 million Americans anxiously wait for the Social Security Administration to decide whether (and by how much) benefits will increase each year.  Although this yearly decision on the cost-of-living adjustment (COLA) affects millions of older Americans—especially Medicare beneficiaries who collect Social Security—the calculation surrounding the adjustment is a mystery to many and an inaccurate measure of inflation for seniors.

Last October, the Social Security Administration announced that the COLA for Social Security benefits would be 0.3 percent for 2017. But how did they arrive at this seemingly arbitrary number? It’s puzzling, especially after the Administration decided that there would be no COLA in 2016.

In order to determine whether there is a COLA, each year, the Social Security relies on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This index tracks monthly price changes in more than 80,000 consumer items—everything from gas prices and grocery costs to airline fares and medical care.
Every fall, the U.S. Bureau of Labor Statistics determines the CPI-W for the third quarter.

Officials then compare it with the CPI-W for the third calendar quarter of the last year in which a COLA was awarded. If the comparison shows prices have gone up between those third-quarter periods, Social Security will grant a cost-of-living hike. These increases are rounded to the nearest 10th of a percent and paid starting in January.

Based on this calculation, the government determined that Americans on Social Security would receive a 0.3 percent COLA in 2017; this adjustment essentially added a mere $5 to the average monthly payment for all retired workers, which was $1,355 before the raise.
Fair enough; but what does COLA mean for older Americans? For Medicare beneficiaries who collect Social Security, this minor COLA in 2017 will be used to pay for the higher charges for their Medicare Part B coverage.

Most Medicare beneficiaries who collect Social Security get their Medicare Part B premium deducted from their monthly Social Security checks. And, according to federal law, Social Security payments generally must not decline from one year to the next. However, with the 0.3 percent COLA, 70 percent of Medicare beneficiaries “held harmless” saw their average 2017 premium increase to about $109.00. (In 2016, when there was no Social Security COLA, the Medicare Part B premium remained flat at $104.90 per month for beneficiaries “held harmless.”)

This illustrates the predicament faced by many older Americans: the inflation measure used to calculate the Social Security COLA doesn’t accurately reflect this population’s expenses. According to the Bureau of Labor Statistics, this year’s cost-of-living raise will not keep pace with the 5.1 percent increase in the cost of health care from August 2015 to August 2016. Clearly, the CPI-W does not accurately measure the inflation in medical costs experienced by millions of older consumers.

And it’s even worse for the 3 out of 10 Medicare beneficiaries not “held harmless.” Because of this provision covering the other 70 percent of beneficiaries, premiums for the remaining percentage must cover most of the increase in Medicare costs for 2017 for all beneficiaries. Those beneficiaries who are not covered by the “held harmless” rule, such as new enrollees, those on Medicare who have not yet claimed Social Security, and higher-income seniors, saw their standard monthly premium for Medicare Part B jump to $134.00, a 10 percent increase.

While the Centers for Medicare & Medicaid Services (CMS) stated that they will continue to monitor and review the Social Security COLA, measures must be taken to protect seniors from this clear discrepancy. It’s clear that changes must be made to moreaccurately account for the medical spending patterns of older Americans.