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Why next year's rise in Social Security payments isn't so bad

The Motley Fool logo The Motley Fool 10/15/2019 Maurie Backman

The Social Security Administration just announced that recipients will be getting a 1.6% raise going into 2020. That raise comes in the form of a cost-of-living adjustment, or COLA.

Implemented back in the 1970s, automatic COLAs are designed to help seniors maintain their buying power when inflation causes the cost of goods and services to rise. But don't be confused by the word "automatic" -- COLAs vary from year to year, and they're based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Historically, COLAs have been as high as 14.3%, though in recent years, we haven't seen numbers anywhere close. Still, 2020's 1.6% COLA may seem like a slap in the face compared to 2019's far more generous 2.8% COLA. In fact, millions of seniors are no doubt up in arms over the latest news, but here's why they actually shouldn't be.

1. A 1.6 percent COLA is better than nothing

When the CPI-W doesn't indicate an increase in consumer spending, Social Security benefits can remain stagnant, and that's precisely what happened going into 2009, 2010, and 2015, when seniors saw no boost to their benefits at all. Meanwhile, the COLA entering 2017 was just 0.3% -- hardly enough to make a real difference in the average beneficiary's monthly income. Therefore, while a 1.6% COLA isn't as robust a raise as some would like, it's also better than the numbers we've seen in the not-so-distant past.

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2. Medicare premium increases shouldn't completely wipe it out

Many seniors who are on Medicare and Social Security at the same time opt to have their Part B premiums paid directly from their Social Security benefits. Not only does this eliminate the hassle of having to send those premiums in, but it buys seniors some protection thanks to Medicare's hold-harmless provision. This provision states that a senior on Social Security can't take a hit in benefits if Part B premium increases outpace a COLA for a given year. In other words, if a COLA adds $15 a month to a senior's benefits, and Medicare goes up $16 a month that same year, the most that senior will pay as a Part B increase is $15.

The problem, of course, is that some years, Medicare Part B premium increases do, in fact, wipe out seniors' raises entirely. But for the typical Social Security recipient, this doesn't look to be the case for 2020. The average monthly Social Security benefit at present is $1,471, while recent projections put Part B's 2020 premium increase at $8.80. If that estimate holds up, an uptick in Part B won't completely wipe out the typical recipient's COLA.

3. You have other options for boosting your income

Social Security was never meant to sustain seniors in the absence of other income. Those benefits replace about 40% of the average earner's pre-retirement earnings, while most seniors need roughly double that sum to live comfortably.

Seniors who rely on those benefits appropriately shouldn't be hurt too much by a low COLA, because chances are, they have additional income sources to tap, like retirement savings. Furthermore, if you've mostly been banking on Social Security to keep up with your expenses in retirement, there's always the option to start working in some capacity during your golden years. That could mean consulting in your former field, finding a random part-time job at a local retailer, or turning a hobby you enjoy, like crafting or knitting, into a modest income stream. The point, either way, is that you're not necessarily limited to a 1.6% raise next year, provided you're willing to make the effort.

Though the upcoming Social Security COLA may not be as substantial as most seniors would like, it's not the worst-case scenario, either. The key is to make the most of that money by following a strict retirement budget and making smart choices that allow you to stretch your income as much as possible.

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