WASHINGTON -- Tens of millions of Social Security recipients and other retirees will get a 2.8 percent boost in benefits next year as inflation edges higher. It's the biggest increase that most retired baby boomers have gotten.
After a stretch of low inflation, the cost-of-living adjustment for 2019 is the highest in seven years. It amounts to $39 a month for the average retired worker, according to estimates released Thursday by the Social Security Administration.
The cost-of-living adjustment affects household budgets for about 1 in 5 Americans, including Social Security beneficiaries, disabled veterans and federal retirees. That's about 70 million people, enough to send ripples through the economy.
Unlike most private pensions, Social Security has featured inflation protection since 1975. Beneficiaries also gain from compounding since cost-of-living adjustments become part of their underlying benefit, the base for future cost-of-living increases.
Nonetheless, many retirees and their advocates say the annual adjustment is too meager and doesn't reflect higher health care costs for older people. Federal budget hawks take the opposite view, arguing that increases should be smaller to reflect consumers' penny-pinching responses when costs go up.
With the cost-of-living adjustment, the estimated average monthly Social Security payment for a retired worker will be $1,461 next year.
"For more recent retirees, the 2019 [cost-of-living adjustment] will be the largest increase they have gotten to date," said policy analyst Mary Johnson, of the nonpartisan Senior Citizens League.
But retiree Danette Deakin of Bolivar, Mo., said she feels as though her cost-of-living adjustment is already earmarked for rising expenses.
Her Medigap insurance for costs not covered by Medicare is going up, and so is her prescription drug plan. She expects her Medicare Part B premium for outpatient care also to go up.
"It isn't enough of an increase that it takes care of all of the increases from health care, plus rent -- our rent gets increased every year," said Deakin, 70, who worked in the finance department at a boat dealership.
Health care costs eat up about one-third of her income, she estimated.
"I appreciate the [cost-of-living adjustment], and in no way am I complaining," Deakin added. "It's just that every single thing you can talk about goes up. It doesn't go down."
By law, the cost-of-living adjustment is based on a broad index of consumer prices. Advocates for senior citizens say the general index doesn't accurately capture the rising prices they face, especially for health care and housing. They want the government to switch to an index that reflects the spending patterns of older people.
"What the [cost-of-living adjustment] should be based on is still a very real issue," said William Arnone, chief executive officer of the National Academy of Social Insurance, a research organization not involved in lobbying. "Older people spend their money in categories that are going up at a higher rate than overall inflation."
The adjustment is now based on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, which measures price changes for food, housing, clothing, transportation, energy, medical care, recreation and education.
Advocates for older Americans would prefer the CPI-E, an experimental measure from the government that reflects costs for households headed by someone age 62 or older. It usually outpaces general inflation, though not always.
Adjustments can be small or zero, as was the case in several recent years. People often blame the president when that happens. However, the White House can't dictate the cost-of-living adjustment, which is calculated by nonpolitical experts.
President Donald Trump has repeatedly vowed not to cut Social Security or Medicare. But the government is running $1 trillion deficits, partly as a result of the Republican tax-cut bill Trump signed. Mounting deficits will revive pressure to cut Social Security, advocates for senior citizens fear.
"The revenue loss in the tax bill contributes to much higher deficits and debt, and that is where the threats begin to come in," said David Certner, policy director for AARP. "Social Security, and in particular the [cost-of-living adjustments], have been the target."
Former President Barack Obama floated -- but ultimately dropped -- a proposal called chained CPI, which would have slowed annual adjustments to reflect penny-pinching by consumers. Behind it is the idea that when the price of a particular good or service rises, people often respond by buying less or switching to a lower-cost alternative.
Because of compounding, smaller cost-of-living adjustments would have a dramatic effect over time on the federal budget and Social Security finances. But if inflation continues to rise, proposals to scale back the adjustments carry greater political risk.
Beyond federal budget woes, Social Security faces its own long-term financial problems and won't be able to pay full benefits starting in 2034.
Social Security is financed by a 12.4 percent tax on wages, with half paid by workers and the other half paid by employers. Next year, the maximum amount of earnings subject to the Social Security tax will increase from $128,400 to $132,900.
About 177 million workers pay Social Security taxes. Of those, nearly 12 million workers will pay more in taxes because of the increase in taxable wages, according to the Social Security Administration.
Monthly annuity benefits for most retired federal employees also will rise by 2.8 percent in January, the government announced Thursday. It is the largest increase since 2012.
The cost-of-living adjustment mirrors the increase for Social Security and is based on a 12-month calculation of inflation that ended with the announcement of the figure for September.
There were 2,078,000 federal retirees plus 534,000 survivors drawing benefits from one of the two main federal retirement programs as of September 2016, the latest figures available from the Office of Personnel Management. The Civil Service Retirement System generally applies to those first hired before 1984, after which newly hired employees were put in the Federal Employees Retirement System.
While the Federal Employees Retirement System now applies to about 95 percent of current workers, two-thirds of retirees are drawing benefits from the Civil Service Retirement System, where the average monthly annuity is just under $3,600 and the mean monthly annuity -- where half are above and half below -- is slightly above $3,100.
Under the Federal Employees Retirement System the average monthly annuity is just under $1,400 and the mean is just under $1,100. The federal retirement civil service benefit is lesser because unlike the Civil Service Retirement System, the federal retirement system includes Social Security.
Cost-of-living adjustments are prorated for those who were retired for less than 12 months at the time of the payout. Otherwise, civil service retirees receive the full cost-of-living adjustment regardless of age. For someone drawing an average civil service retirement benefit, monthly payments will rise by about $100.
The picture is more complicated regarding the Federal Employees Retirement System. Those retired under that system don't receive an adjustment to the civil service portion of their benefits until age 62 unless they are disabled or they retired under special provisions for law enforcement officers, firefighters and air traffic controllers. Further, if the inflation count falls between 2 percent and 3 percent, as it did for the coming adjustment, the payout is 2 percent.
That policy "prevents [the Federal Employees Retirement System] annuities from keeping up with inflation, which is the whole point of a [cost-of-living adjustment]. It is past time for Congress to ensure [federal] retirees receive a full [adjustment] each year," Richard Thissen, president of the National Active and Retired Federal Employees Association, said in a statement.
Those retired under the Federal Employees Retirement System do receive the full adjustment on their Social Security portion, however.
Thissen also called on Congress to pass a pending House bill to use a different inflation measure, one focusing specifically on spending patterns for retirees, which he said indicates an increase of about 0.2 percentage points more on average.
The White House budget proposal early this year sought to end cost-of-living adjustments on the civil service portion of federal retirement benefits while shaving a half-percentage point off the adjustments for Civil Service Retirement System retirees. Congress has not acted on those proposals.
Information for this article was contributed by Ricardo Alonso-Zaldivar of The Associated Press; and by Eric Yoder of The Washington Post.
A Section on 10/12/2018
Print Headline: Benefits set to rise 2.8% for retirees