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Attention, Social Security recipients: Here's what your next raise might look like

The Motley Fool logo The Motley Fool 9/16/2019 Maurie Backman

The average senior on Social Security today collects $1,471 a month, which amounts to $17,652 a year. That's not a ton of money, given the expenses retirees face, from mounting healthcare costs to basics like housing, food, and transportation.

Yet 21% of married seniors and 45% of unmarried seniors depend on Social Security for 90% or more of their income. It therefore stands to reason that millions of retirees are anxious to learn what their cost-of-living adjustment, or COLA, will look like for 2020.

Automatic COLAs were implemented in the 1970s to help seniors on Social Security maintain their buying power in the face of inflation, and they're determined based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Though the CPI-W is by no means an accurate measure of what seniors spend, it's the current benchmark used for establishing COLAs. And while it hasn't yet released its September data, the nonpartisan Senior Citizens League is estimating a 1.6% COLA for seniors going into the new year.

That's both good news and bad news.

First, the positive: COLAs are by no means guaranteed, and when the CPI-W doesn't indicate a general uptick in cost of living, seniors can get stuck with no raise at all. That's happened three times already over the past 10 years, and in 2017, seniors saw an almost negligible 0.3% COLA. In comparison, a 1.6% raise seems generous.

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On the other hand, seniors got a 2.8% raise going into 2019, so by comparison, 1.6% doesn't look all that great, especially when we consider that it only puts another $23.50 a month into the average beneficiary's pocket. That's hardly enough to make a difference in the lives of seniors who are already on shaky financial ground.

Medicare could be a problem too

Another issue with a not-so-stellar COLA boils down to Medicare's hold harmless provision -- a provision that's technically designed to protect seniors but often comes back to haunt them. The provision states that seniors can't face a dip in Social Security benefits when Medicare premium increases outpace COLAs. If the cost of Medicare goes up a lot this year, seniors who pay their premiums directly from their benefits could see a large chunk of their COLA wiped out -- or, in some cases, see their entire COLA eaten up by Medicare.

Don't count on those COLAs

Seniors who are heavily dependent on Social Security and struggling financially as a result must recognize that even a sizable COLA isn't the answer to their money-related woes. Rather, the solution often lies in making lifestyle adjustments (difficult as those may be) and boosting their income in other ways. For example, downsizing can make housing expenses more manageable in retirement, while cutting back on non-essentials, like restaurant meals, could give seniors more financial wiggle room in their budgets.

Getting a part-time job is a good bet as well. Doing so guarantees an income boost, and one that's apt to be far more substantial than a COLA-driven raise.

The Social Security Administration won't announce its official 2020 COLA until October 10. Till then, the best seniors can do is sit tight, hope for the best, and start thinking about active steps they can take to improve their financial picture.

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