Close
ThinkAdvisor

Retirement Planning > Social Security

No Social Security COLA means flat DC limits, too

X
Your article was successfully shared with the contacts you provided.

Because the Social Security Administration has announced that there will be no cost-of-living allowance increase in 2016 for beneficiaries, people socking money away in their 401(k)s will find themselves unable to raise their contributions — even if they can.

This is only the third time in 40 years that there hasn’t been a COLA — the other two were in 2010 and 2011 — since the automatic increase system went into effect in 1975.

Read: 3 handy inflation calculators for retirement planning

And it’s going to hurt more than current retirees.

Even some pre-retirees will be paying the price: the legal limits for contributions to defined contribution plans won’t be increasing either, which means defined contribution participants will have less money at retirement than if the COLA allows for a boost in contributions.

The 2015 limit is $18,000 for people under 50 years of age, while those over 50 are allowed an additional catch-up contribution of $6,000.

With the CPI keeping Social Security flat, neither of those contribution limits will rise.

Of course, it’s not likely to affect all that many people, since few manage to contribute the maximum each year and many people save nothing at all.

But it’s still going to hurt, in the long run.

As might be expected, news about the lack of a raise isn’t sitting well with current Social Security recipients either.

They will face higher costs of goods and services that retirees use more of—such as medical care and pharmaceuticals—without any increase in their checks to help pay for them.

And the price is rising faster on those categories than it is on other staples, such as food and clothing.

The culprit is the low price of fuel, which has depressed the Bureau of Labor Statistics’ Consumer Price Index—whose full name is actually the Consumer Price Index for Urban Wage Earners and Clerical Workers.

But retirees’ consumption and spending habits are so different from those of workers that advocates for seniors say that the standard by which the cost of living should be measured is actually the CPI-E, in which the E stands for elderly.

So far, however, efforts to change that have come to naught.

As a result, under the standard CPI, Social Security won’t be increasing, but some 30 percent of retirees will be facing higher Medicare Part B premiums this year. That means they’ll effectively get less of their retirement income—which, for higher-income recipients, may still come from Social Security or may instead come from such sources as the old Civil Service Retirement System.

Read: Top 5 retirement advisor comments