Two Misconceptions Retirees May Have About the Next Social Security COLA

If you’re one of the millions of older Americans who receive Social Security every month, you may have been watching closely for word on the next cost-of-living adjustment, or COLA.

The official COLA is 3.6%, a noticeably larger increase than the 2.8% adjustment that was added to Social Security benefits earlier this year.

Still, before you start planning around that 3.6% figure, it helps to know a couple of important details. Retirees could easily misunderstand two things about the upcoming increase.

1. It will automatically improve your finances

It’s easy to view a Social Security COLA as a yearly raise. In reality, it is meant to help offset rising costs.

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

The 3.6% COLA scheduled to be added to benefits is based on price changes from July, August, and September. So although a raise of that size may sound significant, it is unlikely to leave retirees substantially better off. The purpose of the adjustment is simply to help benefits keep pace with the higher costs that have already taken hold.

2. You get to keep the full amount

It’s natural to assume the entire COLA stays in your pocket. But if you’re enrolled in Medicare, part of it may be offset if Part B premiums rise.

People who receive Social Security and Medicare at the same time generally have Part B premiums deducted from their Social Security checks. For example, if the new COLA raises monthly benefits by $68 but Medicare Part B costs climb by $11 a month, the actual net increase would be $57. That is an important detail to factor in before building a budget around the new benefit amount.

The upcoming Social Security COLA may be welcome, especially after a smaller increase earlier in the year. But retirees should keep in mind that it may not translate into meaningful financial breathing room, and they may not keep every dollar if Medicare Part B premiums rise again.