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Social Security's 2018 Raise May Not Reach Up to 70% of Its Beneficiaries

Sean Williams, The Motley Fool

For tens of millions of Americans, Social Security provides a financial foundation that they simply couldn't live without. Data from the Social Security Administration (SSA) in 2016 finds that 62% of retired workers -- and there are more than 42 million of them receiving a monthly stipend from the SSA -- relies on their monthly payment for at least half of their income.

Social Security's 2018 raise is announced

Given how important Social Security income is for a majority of seniors, last week's inflation data release from the Bureau of Labor Statistics (BLS) bore particular importance. The BLS's September inflation announcement was the last piece of the puzzle needed to figure out what the cost-of-living adjustment (COLA) would be in the upcoming year. Think of COLA as nothing more than the "raise" that Social Security beneficiaries receive from one year to the next as a result of inflation.

A Social Security car wedged in between cash bills.

Image source: Getty Images.

Social Security's COLA is tethered to the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. The average reading of the CPI-W during the third quarter (July, August, and September) of the previous year acts as the baseline figure, while the average reading from the third quarter of the current year acts as the comparison. If the average price of the eight major spending categories tracked by the CPI-W rises, then Social Security recipients receive a raise that's commensurate with the percentage increase from the previous year, rounded to the nearest 0.1%. If prices fall year over year, benefits remain the same. Thankfully, they can never fall because of deflation.

The Oct. 13 data release from the BLS allowed us to determine that Social Security beneficiaries are on track to receive a 2% raise in 2018. Considering that the August snapshot from the SSA shows the average retired worker receives $1,371.14 a month, it means a little more than $27 extra a month in the pockets of the average beneficiary. 

However, there's quite the caveat to this year's Social Security raise: Most beneficiaries may not get it.

A majority of Social Security recipients may not receive their raise

Most Social Security recipients fall into two groups. First there are those who are eligible to receive Medicare, are currently enrolled in the program, and have their monthly premiums deducted from their Social Security payout. The second category includes those who aren't enrolled in Medicare and brand-new Medicare enrollees for 2018. This group also includes those who prefer to be billed directly by Medicare for their monthly premiums as opposed to having their premiums automatically deducted from their monthly Social Security check.

A woman holding coins in her hand, while an older man looks confused at the coins in her hand.

Image source: Getty Images.

Over the past couple of years, brand-new enrollees to Medicare, people who prefer to be directly billed for premiums, and those enrolled (age 65 and up) in Medicare who are waiting to sign up to receive Social Security benefits, have taken the brunt of Part B premium increases. Medicare Part B covers outpatient services and prescription medicines administered in an outpatient setting. With healthcare costs having risen rapidly in recent years, these folks have seen their monthly Part B premiums rise by a high-single-digit, or perhaps low-double-digit, annual percentage.

Meanwhile, the majority of folks, comprising about 70% of people who are receiving both Medicare and Social Security, have been protected from these rapid increases by the "hold harmless" clause. Put simply, the hold harmless clause ensures that existing Medicare members don't see their Part B premiums rise at a faster pace than their Social Security COLA. Thus, Social Security's 2017 raise of 0.3%, the smallest on record, kept Part B premiums from rising by more than 0.3% in 2017 for about 70% of people. The bulk of the increase was passed along to the aforementioned group.

In the upcoming year, we're going to see a reversal. Part B premiums aren't expected to move higher, meaning brand-new retirees, those who prefer to be directly billed, and those holding off on claiming Social Security until a later age, shouldn't see their premiums increase relative to the 2017 levels. Comparatively, those who've been protected by hold harmless could see some, or all, of their raise gobbled up by Medicare Part B in order to "catch up" for the lower premiums they've paid in recent years.

A frustrated senior woman with her hands on her head having a discussion with a doctor.

Image source: Getty Images.

The salt in the wound

If this weren't enough salt in the wound for most retired workers, there's more. Despite receiving a 2% COLA, which is the highest raise in six years, there's a decent chance that the purchasing power of your Social Security dollars will continue to decline.

Earlier this year, The Senior Citizens League released a study that showed seniors' Social Security benefits have lost 30% of their buying power since the year 2000. What $100 would have bought in Social Security dollars in 2000 now buys just $70 worth of goods and services.  This is a result of rising medical care costs and higher rental or home expenditures. Even with medical care costs looking tamer in 2018 than in previous years, it doesn't mean other costs, including housing expenses, won't eat up seniors' Social Security raise and some.

In other words, many seniors might be saying "Thanks for nothing, Social Security" once again in 2018.

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