There will be no cost of living increase for Social Security retirees in 2016. For only the fourth time in the last 40 years, all four occurring since 2010, the formulaic calculation of the potential cost of living increase for Social Security benefits is 0%. The main reason is reported to be the impact of lower gasoline prices on the consumer price index, the government’s barometer for Social Security cost of living increases.
For some Social Security retirees, monthly retirement income will actually decrease. While their gross monthly check remains the same, the expected increase in of Part B Medicare premiums will result in a lower net amount available for living expenses. About 70% of retirees are protected from this result – their net amount will remain unchanged – but for the remaining 30% who will bear the entire burden of the increase (think income redistribution), net monthly checks are expected to decrease by $54 to $159.
The calculated 0% cost of living increase also means there will be no increases to any of the contribution and benefit limitations that apply to qualified retirement plans. 401(k) plan contribution limits for 2016 will be unchanged as will be maximum benefits payable from defined benefit plans.
For almost everyone, low inflation is good news. But there is a difference between low inflation and no inflation which is one indication of a still stagnant national economy. And, for some of us, no inflation – which is what a 0% cost of living adjustment (at least in theory) represents – comes with a cost.
Alan is a former IAI consultant and continues to be a frequent collaborator on actuarial matters.