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A Sip of Flat COLA For Your Social Security? What To Consider

February 15, 2017
Social Security COLA and retirement savings.
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When it comes to Social Security, the government sometimes gives and often takes away. This year it's taking away a little more from workers while the amount it parcels out to retirees barely climbs.

It hardly seems like a win-win for either group, as the Social Security Cost of Living Adjustment (COLA) for 2017 rises just 0.3%, meaning about $5 extra per month for the average recipient. That’s barely enough to buy a carton of milk, though it’s actually better than last year, when COLA didn’t rise at all.

Meanwhile, for those of us still working, the amount of wages subject to Social Security taxes is now $127,200, up from $118,500 in 2016. Though only the top 16% of households make that much, according to the Census Bureau, it it does mean higher taxes for those who pull in the big bucks. For instance, an employee making $150,000 and subject to the 7.65% Social Security tax on wages would owe taxes on an additional $8,700 of his or her income, meaning extra taxes of about $665 a year. The actual tax rate, however, isn’t changing.


The 0.3% inflation-adjusted COLA this year may raise eyebrows among some retirees. After all, costs for certain items, including housing and health care, rose pretty sharply last year. Overall, the Consumer Price Index was up 2.1% in 2016, according to the Bureau of Labor Statistics. That’s way more than 0.3%.

But Social Security calculates COLA based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers. That’s not the same as CPI, as it only includes information for certain demographics. So 0.3% it is.

“The small COLA is a reflection of the cost of living rising slowly, so retirees have the same basic cost of living,” says Kathy Stokes, Senior Adviser, AARP.

But with costs rising more than 0.3% for a lot of goods, it doesn’t mean the small COLA is necessarily enough for everyone. “There are people out there who are feeling pain,” Stokes says.

Double Gulp!

The lessons? Inflation can be in the eye of the beholder, and retirees and those saving for retirement may need to find ways to depend less on Social Security payments, analysts say. This means saving more ahead of time if possible, or finding other sources of income once in retirement.

“If you’re not at retirement age, save as much as you can, because every little bit counts,” says Dara Luber, Senior Manager, Retirement, TD Ameritrade. “People are living longer and they need to know their money is going to work for them."  Luber says that, while everyone should invest based on their own risk tolerance and time horizon, if you are in or near retirement, you may want to consider the bucket strategy, in which your portfolio is segmented into "buckets" of risk tolerance depending on how soon you will need it. She says it's important to review your goals and risk tolerance periodically. 

"Set up regular contributions and make sure you're staying on track," Luber says.

For those already in retirement and struggling with costs even as the government says costs aren’t rising, there may be more serious lifestyle changes to contemplate. “It’s a matter of looking for ways to put more money away while you’re working; or, if you’re already retired, looking for alternatives for extra income,” Stokes said. “Join the ‘gig’ economy driving for Lyft or Uber; get a part-time job, or rent out a room. There are more opportunities now than ever before for people who are retired to find meaningful ways of making more income.”

For those retirees who don’t really relish the thought of diving back into the job market, even part-time, or for near-retirees who don’t want to work through their golden years, it may be helpful to consider an investment that can deliver regular payouts during retirement, such as an annuity. “A guaranteed income may help you pay for your needs,” Luber said.

Social Security can help, too, but with payouts growing so slowly and not keeping up with CPI, it’s important not to depend entirely on those monthly checks.

Let’s Figure Out Retirement Planning

Whether you need a little guidance or a lot, we can help. Speak with a TD Ameritrade retirement consultant at 800-213-4583.

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