So many older Americans rely on Social Security, but the first projections for the 2021 cost-of-living adjustment, or Social Security COLA, is not looking great amid a coronavirus-stalled U.S. economy.
Study: Purchasing power of Social Security has decreased by 18% in the last decade.
Next year’s Social Security COLA won’t be set in stone until October 2020, but The Kiplinger Letter is projecting the adjustment will continue its downward trend of the past few years and land below 1% thanks to reduced consumer activity amid the novel coronavirus pandemic.
The Social Security COLA for 2020 was only 1.6% after a 2.8% increase in 2019. There are laws in place to prevent the Social Security Administration from allowing inflation to cut into how effective the benefits program is for supporting millions of Americans, but the way COLA is calculated has been a point of contention.
How Social Security COLA Is Calculated
While the Social Security COLA is meant to keep up with inflation, it’s far from a perfect system.
The SSA uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to calculate the annual Social Security COLA. It’s a national average, and data from the third quarter (July-September) is used because Q4 data is not available from the Bureau of Labor Statistics at the time the COLA must be set in October.
If inflation rises, the Social Security COLA will rise. If the country experiences deflation, then the COLA will be zero for the year. That happened in 2010, 2011 and 2016.
Looking at the CPI-W, the inflation forecast for 2021 is only 1% right now because of the lack of consumer activity amid the novel coronavirus outbreak. Kiplinger argues that while the biggest price declines have already happened, prices will most likely remain depressed for any activity involving travel or large entertainment gatherings because of social distancing.
Spikes could happen for some prices as consumer demand causes shortages, but Kiplinger doesn’t see it offsetting the low prices elsewhere.
Problems With Calculations
Some argue that using the CPI-W to calculate the Social Security COLA is problematic because it doesn’t place as much weight on goods and services more frequently purchased by older Americans, such as health care.
Another index, the Consumer Price Index for the Elderly (CPI-E), has been championed by advocates who think it could help create a more accurate adjustment for inflation.
The Senior Citizens League conducted a study in 2019 and found the purchasing power of Social Security has decreased by 18% in the last decade.
The adjustment for 2020 was only 1.6%, which is around $24 extra per month for the average beneficiary.
Medicare Part B premiums rose by $9.10 in 2020, which knocked out a good chunk of Social Security’s “raise” for any beneficiaries enrolled in both programs. And that’s only one example of rising medical costs.
We’ll keep an eye on these Social Security COLA news throughout the year. But if the numbers hold up from these early projections, you shouldn’t expect much of a “raise” next year.