Social Security Increase in 2015 Will Be Small -- Again

Why Your Social Security Increase in 2015 Will Be Small -- Again

September 13, 2014

The Motley Fool - Millions of retirees rely on Social Security for a huge portion of their overall incomes. Given the meager benefits that many receive, the annual cost-of-living adjustments to Social Security benefits are crucial to help recipients make ends meet. Yet as retirees look forward to next year, they should prepare themselves for another small Social Security increase in 2015.

Even though the final figures won't be available until late October, the initial signs aren't looking promising for those counting on a big boost to their monthly checks. Looking at the process that the Social Security Administration follows in determining each year's cost-of-living adjustment can help you understand why so many retirees have been frustrated about the size of their benefits lately.

How will your Social Security increase for 2015 be calculated?

The federal government indexes Social Security benefits to inflation in order to help ensure that retirees' benefits keep up with rising prices, which erode the purchasing power of those benefits. Cost-of-living adjustments take effect each year on Jan. 1, with January checks being the first to reflect Social Security increases.

But the Social Security Administration needs time to implement cost-of-living adjustments. The SSA uses inflation figures from the summer months of July, August, and September to determine how big each year's adjustment will be. Once all three figures are available, the SSA takes the average inflation of those three months in the current year and compares it to same average of the previous year. The difference defines the amount that benefits will go up at the beginning of next year.

So far, because of the lag time involved with collecting government data, we only have July's inflation figures available. But based on past trends, you can still draw some useful conclusions about how much you'll likely see your Social Security payments rise in 2015 -- and many of those drawing benefits will be disappointed once again.

COLAs: Better than last year -- but still small

The news for Social Security recipients isn't all bad. Initial indications show that the rise in Social Security benefits is likely to be the largest in three years. At the beginning of 2014, recipients got just a 1.5% boost to benefits, and that followed a 1.7% rise for 2013.

Nevertheless, recipients shouldn't expect a huge improvement. Based solely on July's figures for the CPI for Urban Wage Earners and Clerical Workers, on which Social Security bases cost-of-living adjustments, inflation has risen at roughly a 1.8% clip during the past year. That's quite a bit less than the larger adjustments that retirees have typically received since COLAs began in 1975.

Source: Social Security Administration. Note: Year reflects the year for which inflation data was measured; benefits increased at the beginning of the following year.

The remaining wildcard is what will happen to inflation during the next couple of months. In a handful of years, the most recent of which was 2008, the CPI-W has trended downward during the summer months, causing Social Security COLAs to come in smaller than one would have projected based on July figures. By contrast, one of the things that prevented 2013's benefit increase from being even smaller was a jump of more than a full percentage point in the inflation rate between July and September. Without those gains, the adjustment for that year would have been just 1%.

Prepare to make do with a modest Social Security increase in 2015

Currently, most economists project little to no change in inflation for August. If that holds true, September would have to produce a big inflation spike for the 2015 increase in benefits to move the three-month average enough to raise COLAs higher than the 2% mark.

For retirees who rely on the income that Social Security provides, that news is far from welcome. However, so long as inflation remains under control, retirees will have to accept that their Social Security checks won't get much bigger for the foreseeable future.