Social security benefits will increase by 2.8% in 2019 – The Motley Fool

Social security is arguably the country's most important social program, with data showing that 62% of older beneficiaries rely on their monthly payment to account for at least half of their income. In addition, a report from the Center on Budget and Policy Priorities reveals that 22.1 million people, including 15.1 million seniors, are being saved from poverty by their social security checks.

With this in mind, the most important event of the year for these people is undoubtedly the announcement of an adjustment according to the cost of living (COLA) (c.- ie "The increase" that beneficiaries will receive next year) from the Social Security Administration. (SSA) during the second week of October. This announcement was made today, October 11th.

Understand how the social security COLA is calculated

However, recipients should not wait for the official announcement of the SSA to calculate their social security COLA for 2019. Once the Bureau of Labor Statistics (BLS) released its September 2018 inflation data We have all the information needed to determine how much an increase social security beneficiaries will receive next year.

You see, the social security inflation index, the consumer price index for urban employees and office workers (IPC-W), only takes into account three months of inflation data rather than a full year. The average reading of the CPI-W in the third quarter of the previous year (July to September) is the basis, while the average reading of the third quarter of the current year is the comparison. It takes at least a good week for the BLS to compile all the data for CPI-W's main categories and subcategories of expenditures. This is why the publication of the data will not be communicated until the second week of the following month.

If the average reading of the third quarter of the current year is greater than the average reading of the previous year 's CPI – W, beneficiaries receive an increase proportional to the increase in percentage, rounded to the nearest 0.1%. And if prices dropped from year to year, as was the case in 2010, 2011 and 2016, the benefits will remain unchanged from one year to the next.

The good news for recipients is that prices have certainly increased from one year to the next. Let's take a closer look at how the 2018 Social Security COLA was determined.

Here is your 2018 social security COLA

We begin by outlining the three important readings of the CPI-W for the third quarter of 2017 that make up the base figure.

• July 2017 IPC-W: 238617
• August 2017 CPI-W: 239448
• September 2017 CPI-W: 240939

If these numbers are summed and divided by three (since there are three months taken into account), then the average reading of the CPI-O set at 239,668.

With the release of CPI-W data from September to today (October 11th), we now have the last piece of the puzzle to understand the comparison figure for 2018.

• July 2018 CPI-W: 246155
• August 2018 CPI-W: 246336
• September 2018 CPI-W: 246565

As before, if we add these numbers and divide by three, we get an average of 246,352. If we then subtract the average reading in the third quarter of the third quarter of 2017 from the average reading of the CPI-O in the third quarter of 2018, we will have 6,684. Divide this figure by the average reading of 239,668 compared to the third quarter of last year and you get a 2019 COLA of 2.8% rounding to the nearest 0.1%.

For the context, this is the highest annual increase received by recipients in seven years.

Before being too excited, remember this

Of course, social security recipients, or should I say more specifically the older beneficiaries, are not going to want to take out champagne for the moment. This is because the CPI-W has a natural flaw that causes seniors to gradually lose their purchasing power on their social security income.

According to a report from the Senior Citizens League, the purchasing power of social security dollars has been reduced by almost 34% since 2000. That is, the $ 100 social security benefits purchased 18 years ago can not buy $ 66 of these same goods anymore. Inflation (that is, rising prices for goods and services) has devoured the rest.

You are probably wondering how the CPI-W, designed to measure inflation, has allowed COLA's social security to under-represent so much the inflation that older people are facing. The answer lies in the group of people followed by the CPI-W.

As the name suggests, the CPI-W measures consumption patterns of urban workers and office workerswho spend their money very differently from seniors. This gives much more weight to unimportant spending categories for older beneficiaries, such as education and transportation, while critical expenditures such as medical care and housing do not receive as much attention. that they should not. As a result, the purchasing power of social security dollars remains steadily declining for older people who depend on the program.

In other words, seniors should certainly enjoy the fact that they are about to receive their biggest COLA since 2012, but they will not win any land they have lost due to inflation since 2000.