Folks who already claim Social Security retirement benefits heard they would get more in their checks starting in January, 2019. Good news indeed!
In fact, the Social Security COLA—cost of living adjustment—was quite large: 2.8%. That is the highest increase since 2011. But in real dollars that will be available for retirees to spend, well, some might consider the increase a bit paltry.
On average, monthly benefit checks will increase from $1,422 to $1,461. That’s $39 per month. And, if you are among the highest earners who receive the maximum payment of $2,788, you’ll see a boost of around $78 per month.
Are you surprised? I find most people are less than enthusiastic to hear what the Social Security COLA increase really tallies up to. It’s especially disappointing if they were thinking they’d be buying more champagne…and need to settle for more soda pop!
Social Security COLA: Not Included from the Beginning
Believe it or not, this idea of automatically increasing benefits to help offset rising costs of goods was not part of the 1935 original Social Security Act. If there were to be any increases to existing beneficiaries, it would literally take an act of Congress. And, you can imagine that Congress was not so focused on increasing monthly checks for retirees when they were dealing with World War II.
The net impact to retirees was that they received no increase to their Social Security payments until 1950. So, if you were among the first recipients in 1940, you didn’t see any increase of any amount for a decade. Yet prices rose a whopping 72% between 1940 and 1950. Not surprising, the highest price increases were in 1946 (8.5% inflation rate), 1947 (14.4% inflation rate), and 1948 (7.2% inflation rate), in the aftermath of WWII.
For early Social Security beneficiaries, the average payment was $22.71 per month in 1940. It remained at $22.71 in 1941, 1942, 1943, etc. All the way until 1950. These folks truly understood the meaning of “living on a fixed income.” Their monthly payments were fixed while costs were skyrocketing.
The Nixon Administration Was Key to Social Security COLA
Between 1940 and 1975, adjustments to monthly payments were quite random. During these 35 years, Congress adjusted monthly checks about a dozen times. Then, in 1972, during the Nixon Administration, the Social Security Amendments were passed. They included a permanent provision to make the COLA recalculation automatic and annual.
So, every year since 1975, a calculation has been done, using various consumer price indices as the benchmark. As long as there is a demonstrated increase in prices year over year, Social Security recipients get a “raise”. In the last 43 years, there have only been three years in which there was no Social Security COLA: 2009, 2010, 2015. (You can see all of the Social Security COLA rates on SSA.gov.)
The highest COLA was 14.3% in 1980. Sounds great on the surface, but it actually indicated bad news. When a cost of living adjustment is high, inflation is running high and prices are rising fast. In high inflationary periods, retirees’ income cannot keep up with rising prices. It helps that they receive a larger cost of living adjustment, yet dollar for dollar, they are spending more.
Planning for your own Social Security Income
Whether you are ready to claim Social Security, or are still some years away, it’s important to think about the role Social Security will play in your retirement paycheck. The good news is that you will have a foundation to create your income. And, your Social Security benefit will have a COLA to help keep pace with rising prices throughout retirement.
As importantly, keep in mind that Social Security covers only a portion of your income needs. It provides a modest stream of income throughout your retirement. Annual adjustments will also be modest.
For most of us, the best way to approach our Social Security benefit is to wait as long as possible before claiming – at least until Full Retirement Age (between 66 and 67). And then make sure our other assets and income sources are managed wisely throughout retirement.
Review some of my other blog posts and resources to help you better understand some of the workings of Social Security:
In addition, here are a couple of interesting articles you may want to read:
• Here’s a fun story about Social Security COLA history you might enjoy.
• Take a look at the average Social Security retirement benefits paid since 1940. It’s quite eye opening!