What No Social Security COLA Could Mean for You

For only the third time in 40 years, Social Security recipients won't be getting a bump in their monthly benefits.

Actually, David Leland, a managing director with Merrill Lynch in Boston, says the last eight years have been rough for Social Security beneficiaries. Since 2008, the total of all cost-of-living adjustments, known as COLA, has been 14.3 percent. Those years include all three times when there was no increase in monthly payments.

For comparison, from 1975 to 1982, the first eight years COLAs were offered, Social Security recipients received increases totaling 69.6 percent.

Social Security COLAs are tied to the Consumer Price Index, which dropped 0.2 percent in September. In theory, that means the cost-of-living for Americans should be going down slightly as well. However, the price of gasoline weighs heavily into the index calculation, a cost that doesn't affect retirees as much as medical costs which is expected to trend upward by 6.5 percent in 2016, according to PwC's Health Research Institute.

Leland says it's a perfect storm that has potential to seriously impact people living on a fixed income. "Think of the senior citizen on a tight budget," he says. "They're getting a 0 percent COLA, nearly 0 percent interest on savings and health care expenses are taking off."

Regardless of whether you have a tight budget, here are three ways the loss of a Social Security COLA might affect you next year.

1. Your Social Security benefits will remain flat for 2016.

The most obvious impact of having no COLA is that Social Security benefits for 2016 will remain the same as the benefits in 2015.

Willie Schuette, a national Social Security advisor and financial coach with the JL Smith Group in Avon, Ohio, tries to put a positive spin on the situation: "Recipients of Social Security don't have a benefit loss, even though the [Consumer Price Index] has dropped."

Still, it isn't welcome news for those who may have been planning to use a cost-of-living increase to offset rising medical bills or other expenses. Sharon Miller, a managing director for Merrill Edge, says retirees may be tempted to pull additional money from their other retirement accounts to compensate, but they should exercise caution. "Make sure, as a very general rule, you're not drawing down more than 4 percent of your assets every year," she says.

Taking too much out of retirement accounts could mean you don't have enough cash to last through your later years.

2. Your Medicare premiums could go up.

The loss of the Social Security COLA also means some Medicare beneficiaries could see their Part B premiums increase 52 percent next year.

Normally, all Medicare beneficiaries see their premiums increase each year. However, a provision of the law states if there is no Social Security COLA, then premiums cannot be increased for those who have them deducted from their Social Security benefits. That means about 70 percent of Medicare beneficiaries will see their Part B premiums remain at $105 per month next year.

However, someone has to pay for increasing Medicare costs, and that means the remaining 30 percent of beneficiaries -- those who are not yet receiving Social Security benefits or who pay their Medicare premiums out-of-pocket -- need to cover the expense. "New recipients into Medicare [next year] are going to bear the brunt of that increase," Schuette says. Their premiums will be $159 per month in 2016.

You could avoid the increase by applying for Social Security now before the premium increase goes into effect, but financial planners say don't be hasty. "It looks like a one-year event, not a five- or 10-year event," Leland says. "Don't confuse a short-term Medicare decision with a long-term Social Security decision."

In other words, the Social Security COLA could return in a year, and that will level the playing field for Medicare premiums. In that case, the 70 percent who had flat premiums in 2016 will see their premiums increase in 2017, while the remaining 30 percent could see their premiums drop.

However, by applying for Social Security now, you could lock in a lower rate of monthly benefits than you would otherwise get. "We're telling people to be very careful," Leland says. "If you change your Social Security election now, it's possible you could cost yourself tens of thousands of dollars later."

3. Your other retirement funds could be affected.

Finally, the loss of a Social Security COLA could impact your other retirement accounts as well. Some pensions may tie their cost-of-living adjustments to the one approved for Social Security.

Miller says it's not just retirees who should be paying attention to this issue either. "This doesn't only impact people going into retirement," she says. There is speculation the lack of a COLA means the IRS will keep contribution caps on 401(k)s and IRAs the same as this year, limiting workers' ability to save more in tax-advantaged retirement plans.

While it's possible Congress could step in and find money for a COLA, Schuette says it'd be best to not hold your breath. "[Congress] can do whatever they want," he says, "but they've never come in and added to it [in the past]."

Unfortunately, the only thing for some retirees to do may be to stay close to home in 2016 and cut expenses wherever they can.