Social Security Cost-of-Living Adjustment by 2.8% for 2019 What You Need to Know About

Social Security Cost-of-Living Adjustment by 2.8% for 2019 What You Need to Know About
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Social Security Cost-of-Living adjustment for 2019

Good news for those who receive social security benefit. Starting January 2019, the Social Security Administration will increase the benefit payment by 2.8% [1].  The increment range of social security cost-of-living adjustment in past is 0 to 2% in 6 years. This is the biggest hike next to 3.6% in 2012 [1].

So far, the U.S. inflation rate since December 2017 to September 2018 is 2.4% [2]. If the rest of 2018 keeps about the same rate, the total percentage increase of CPI (consumer price index) is around 3.0%. You might wonder that is the rate of social security cost-of-living adjustment higher than that of CPI? Let’s do some comparison.

In this simulation, we will set the baseline is $1,000 for CPI and Social Security payment in 1990.  Each year’s percentage of increment is added.  We will see how much it will increase year between 1990 and 2017.

 

social security cost-of-living adjustment

 


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CPI Growth vs Social Security Cost-of-Living Adjustment growth

As you can see above chart, the growth rate of social security cost-of-living adjustment is higher than that of CPI. The rate of CPI growth is 84.25% [2] and the growth rate of social security cost-of-living adjustment is 90.51% for the years between 1990 and 2017 [2]. It is roughly 6% margin between them.  It seems a good news for social security beneficiaries. Does this mean the social security beneficiaries are getting paid more?  One of factors not introduced is that the increment is based on the all the items included.  We need to breakdown the inflation rate of each expenses category. Let’s take a look at the CPI rate for each item.

The inflation growth rate by category 1990 – 2017 [2]

Goods and Services% increase
College tuition and fees357.1%
Motor vehicle insurance197.6%
Medical care182.4%
College textbooks**139.8%
Motor vehicle maintenance and repair113.7%
Housing94.5%

Rent of primary residence

122.5%

Owners' equivalent rent of primary residence

109.9%

Fuel oil and other fuels (housing)

143.5%

Energy services (utilities)

85.1%
Food and beverages87.5%
Motor fuel86.1%
Public transportation63.7%
Private transportation (vehicles)58.9%
Motor vehicle parts and equipment39.2%
Recreation*29.0%
Apparel-3.7%

* The data is between 1993 and 2017
** The data is between 2001 and 2017

 

social security cost-of-living adjustment

 

 

First, the college tuition is the winner in the above list. It is eye-popping 357% increase since 1990 [2]. The growth rate is more than four times higher than that of the average CPI growth. $10,000 college tuition in 1990 costs $43,571 today. By the way, I feel truly bad about this. We are forcing the college students who don’t have income or full time job to pay this much expenses.  The impact on the retirees may not be significant and since the retirement life normally won’t involve college education.

 

The inflation rate of Medical expense is much faster

However, if you look at the medical care, that’s 182.4% increase between 1990 and 2017.  The average annual healthcare cost in the U.S. is $10,348 per person [3], that’s 17.9% of Gross Domestic Product (GDP). The total bill of healthcare cost is $3.3 trillion in 2016 [3]. The $1,000 medical bill in 1990 is now $2,824. It is a substantial hike. The same treatment costs 2.8 times more than it did in 1990.

Furthermore, while working-age population spends $6,632 per person a year, the age 65 and older population spent $18,988 per person in 2012 for their healthcare [3]. Considering about this fact, your social security Cost-Of-Living Adjustments is likely to be cancelled out by the rapidly growing high medical expenses.

 

Auto Insurance Inflation Rate

Next, the auto insurance is one of the highest inflation rate in the above chart. The average cost of car insurance is $941.65 per year in 2018 according to ValuePenguin [4]. Though the inflation rate of auto insurance is much higher than the average, the expenditure is not as significant as that of medical expenses. However, thinking about the amount of retirement benefit, it could hurt your budget.  The small costs add up quickly and you need to be wary to manage expenses.

 

Fuel oil and other fuels (housing)

Another item that is higher than inflation rate and may affect your life is the cost of heating oil such as kerosene, propane, and firewood.  Especially for those who live in northern regions or higher elevation, this would painfully affect your everyday expenses.  The average heating oil price in March 2018 is $3.074 per gallon [5].  The average natural gas expenditure for 2017 – 2018 season is $565, and $1,377 for heating oil [6].  This varies depending on where you live.  Some may not have to spend big on the heating bill.  Others may need to spend money for heating fuel for the half of the year.  Similar to car insurance, this is much lower expenses comparing to healthcare cost.  But it adds up.

 

The Growing Cost of Rent

The increasing cost of rent is the most impact on your everyday budget.  The growth rate of rent of primary residence is 122.5%.  The growth rate of owners’ equivalent rent of primary residence is 109.9%.  The rent costed $500 in 1990 costs $1112.5 today.  The median cost of gross rent is $949 between 2012 to 2016 according to U.S Census Bureau [7].  If the growth rate of the rent keeps the current pace, it would be $2111.525 in 2044 calculating from $949 in 2017.  The cost of living expenses is going to be a concern for most of social security beneficiaries.

Furthermore, the proportion of age 65 or older will be higher in the future.  The fact of aging nation may curtail your social security benefit.  There are 2.8 workers to cover each Social Security beneficiary in 2018 [8].  However, only 2.2 workers will support Social Security beneficiary in 2035.  Therefore, your own retirement fund is going to be more important for your retirement life in the future.  You need to play your card wisely.

 

Takeaway

Although the growth rate of social security cost-of-living adjustment is higher than the overall inflation rate, the retirees need to monitor spending carefully. The selected goods and services pertinent to retirees are much higher than average growth of CPI. The conservative spending behavior will leave you little extra money, which piles up. A well-planned and laid out retirement financial plan will be essential to build your stable life.

 


 

References

  1. Social Security Administration
    Cost-of-Living Adjustment (COLA) Information
    accessed on 10/21/2018
  2. U.S. Bureau of Labor Statistics
    CPI-All Urban Consumers (Current Series) Not Seasonally Adjusted
    accessed on 10/21/2018
  3. Centers for Medicare & Medicaid Services National Health Expenditure Data
    NHE Fact Sheet
    accessed on 10/21/2018
  4. ValuePenguin
    Average Cost of Insurance: Car, Home, Renters, Health, and Pet (2018)
    accessed on 10/21/2018
  5. U.S. Energy Information Administration, Independent Statistics & Analysis
    U.S. No. 2 Heating Oil Residential Price (Dollars per Gallon)
    accessed on 10/21/2018 
  6. U.S. Energy Information Administration
    Table WF01. Average Consumer Prices and Expenditures for Heating Fuels During the Winter
    accessed on 10/21/2018
  7. U.S. Census Bureau
    QuickFacts UNITED STATES
    accessed on 10/21/2018
  8. Social Security Administration
    Fact Sheet SOCIAL SECURITY
    accessed on 10/21/2018

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