2 Common Mistakes Retirees May Make About Social Security's Next COLA

Key Points

• Social Security benefits are receiving a 3.6% COLA.

• Retirees should not assume the increase will automatically improve their finances.

• They also should not expect to keep the full amount.

Millions of older Americans who receive Social Security every month may have been waiting to see how large the next cost-of-living adjustment, or COLA, would be.

The official COLA is 3.6%, a noticeably larger increase than the 2.8% boost Social Security benefits received in the prior year.

Still, before building a financial plan around that 3.6% increase, it helps to understand two important points. Many retirees risk misunderstanding both.

1. It is not a true financial windfall

It is easy to treat a Social Security COLA like an annual raise. In reality, it is meant to help recipients catch up with higher living costs.

COLAs are tied to inflation, specifically the Consumer Price Index for Urban Wage Earners and Clerical Workers. They are also based on inflation data from the third quarter of the year.

The 3.6% increase that will be applied to benefits is based on price changes from July, August, and September. So even though the increase may sound substantial, it probably will not dramatically improve your finances. Its purpose is simply to help benefits keep pace with recent cost increases.

2. It is not money you will necessarily keep in full

Another common assumption is that a Social Security COLA automatically stays in your pocket. But if you are enrolled in Medicare, part of that increase may be offset if Part B premiums rise.

People who receive both Social Security and Medicare typically have Part B premiums deducted from their benefits. For example, if the COLA adds $68 per month to your check but Part B costs rise by $11, your actual monthly gain would be $57. That is worth keeping in mind before putting together a budget.

The 3.6% Social Security COLA may be welcome, especially after a smaller increase the previous year. But retirees should remember that the adjustment may not leave them materially ahead, and they may not keep every dollar if Medicare Part B costs go up again.