Some 58 million Social Security beneficiaries still don’t know—yet—what their official cost-of-living increase for 2014 will be, thanks largely to the government shutdown. But that information is expected next week when the government releases inflation statistics for September, and at least two organizations have estimated that Social Security’s COLA for 2014 will be among the smallest increases since 1975.
The American Institute for Economic Research (AIER) estimated that the COLA next year will be between 1.4% and 1.6%, which the group noted is a bit smaller than the 1.7% increase in 2013. And the Senior Citizens League (TSCL) estimated that the 2014 COLA will be about 1.4% to 1.5%, which is well below the historical average of 4.1% and below the 10-year average of 2.5%.
Of note, the Social Security Act specifies a formula for determining each COLA. According to the formula, COLAs are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-Ws are calculated on a monthly basis by the Bureau of Labor Statistics.
And a COLA effective for December of the current year is equal to the percentage increase (if any) in the average CPI-W for the third quarter of the current year over the average for the third quarter of the past year in which a COLA became effective. If there is an increase, it must be rounded to the nearest tenth of 1%. If there is no increase, or if the rounded increase is zero, there is no COLA.
For the record, inflation, as measured by the CPI-W, has been low over the past 12 months, running at around 1.6%. Read Latest Cost-Of-Living Adjustment. Also, read CPI For Urban Wage Earners And Clerical Workers.
So given that sort of COLA, what might you do if you if you aren’t yet taking Social Security? And what might you do if you are taking Social Security?
Small COLA increase can make deferring Social Security more attractive
So one bit of good news for those who haven’t claimed Social Security yet is that small COLA increases can make deferring your Social Security even more attractive. “For those that are on the fence about when to claim their Social Security, small COLAs can make claiming Social Security at a later time even more attractive,” said Matthew Allen, the co-founder and CEO of Social Security Advisors.
In addition to the regular delayed retirement credits that will continue to accumulate by deferring the age at which Social Security is claimed, Allen said claimants will avoid locking in a lower base benefit amount by claiming later.
For the record, Social Security benefits are increased by a certain percentage (depending on date of birth) if you delay your retirement beyond full retirement age, according to the SSA. The benefit increase no longer applies when you reach age 70, even if you continue to delay taking benefits. If you were born in 1943 or later, the yearly rate of increase is 8%. Read Retirement Planner: Delayed Retirement Credits.
Maximize your Social Security
COLAs are important, but Allen said it’s even more important to figure out how to get the highest possible Social Security benefit for your household benefit.
“You want to make sure that one is maximizing his or her Social Security by making the best choices about when to file and how to coordinate one’s Social Security benefits with his or her spouse in order to receive the highest combined spousal and survivor benefits that are available,” said Allen.
As an example, Allen noted that the average couple is leaving roughly $120,000 on the table over their joint lifetimes when they make suboptimal decisions about when and how to file for their Social Security. “This is a far larger amount than what the same couple is likely to receive from even historically high COLAs,” he said. “In other words, focus on what you can control; make smart decisions about when and how to file for your benefits in order to receive the largest base benefit amount available. Any COLA added to this amount will be to your benefit.”
There are many tools and calculators on the web to help you decide when and how to claim Social Security. One such tool is AARP’s Social Security Calculator: When Should You Claim Your Benefits? Other resource can be found at Social Security Advisors.
Check your earnings record for errors
Allen also said Social Security recipients or those about to claim Social Security should check the accuracy of their earnings history on their Social Security statement. “Missing one or two years of earnings that should be included in your earnings history can have an important impact on your Social Security benefits over your lifetime and, in some cases, may be even more substantial than the impact of COLAs,” he said.
You can use my Social Security to get your Social Security Statement, to review estimates of your retirement, disability, and survivors benefits; your earnings record; and the estimated Social Security and Medicare taxes you’ve paid.
Even when small, COLA increase are helpful
So, a 1.5% COLA might not seem like much. But when compared against investments or income sources that are not indexed for inflation, Allen said, “Social Security COLAs provide important protection against inflation both during retirement and also for survivors and are one of the few government-backed income streams that do so.”
Additionally, because one’s life expectancy is inherently uncertain, Allen said COLAs add longevity protection and help retirees cope with this uncertainty by providing a hedge against inflation and extend the longevity of their overall retirement portfolio.
Allen gave this example of the importance of even small COLA increases: If your benefit today is $2,000 per month, in 10 years assuming annual 1.5% COLAs, that $2,000 per month will become $2,321; in 20 years it will become $2,693, and in 30 years it will become $3,126 per month. “Since 1975, Social Security COLAs have averaged 4.1% per year so this example is even more important if COLAs rebound toward their historic averages,” he said.
Monitor your personal rate of inflation
If you’re currently collecting Social Security benefits, experts suggest that you pay close attention to your expenses and your personal rate of inflation, and make sure your investments are keeping pace with inflation and that you have enough in savings to cover any expense not covered by your Social Security benefit. “If real inflation continues to outpace COLAs, it is important for retirees to understand purchasing power will go down and Americans may be more dependent on their savings,” said Karen Wimbish, the director of retail retirement at Wells Fargo.
Of note, expenses for older Americans, those age 62 and above, tend to rise at higher rate than for the population at large. For instance, from December 1982 through December 2011, the all-items CPI-E, which is the Labor Department’s experimental inflation rate for Americans age 62 and older, rose at an annual average rate of 3.1%, compared with increases of 2.9% for both the CPI-U and CPI-W.
According to Labor Department blog, Consumer-price index for the elderly, there are several reasons that older Americans faced slightly higher inflation rates over the past 29 years. “First, older Americans devote a substantially larger share of their total budgets to medical care. The share of expenditures on medical care by the CPI-E population is roughly double that of either the CPI-U population or the CPI-W population. In addition, over the 1983–2011 period, medical care inflation increased significantly more than inflation for most other goods and services (5.1% annually for medical care, compared with 2.8% for all items less medical care). And second, older Americans spend relatively more on shelter, and during the past 29 years shelter costs have modestly outpaced overall inflation.”
Robert Powell is a MarketWatch Retirement columnist. He has been a journalist covering personal finance issues for more than 20 years. Follow him on Twitter @RJPIII.
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