Given the importance of Social Security to the portfolios of the elderly, there is arguably no more anticipated event than the unveiling in October of the cost of living adjustment (COLA) program. Think of COLA as the “raise” beneficiaries receive to account for the inflation they are struggling with. It is not an increase in the truest sense of the word, as it is only designed to keep up with the rising prices of goods and services. Nonetheless, this means more nominal money in the pockets of social security recipients.
While news on COLA’s home front has improved over the past two months, the increase that appears to be headed for beneficiaries in 2021 could be one of the smallest in history.
This is the most important time of the year for social security beneficiaries
As a reminder, the consumer price index of urban and office workers (CPI-W) has been used as the annual inflation link for the program since 1975. This inflationary index includes eight main categories of expenditure and dozens. and dozens of sub-categories, each with their own respective weights. Each month, the Bureau of Labor Statistics (BLS) reports a single figure of the CPI-W that allows a clear comparison of whether or not inflation is inflation.
However, the annual calculation of the COLA for Social Security is derived from a narrow field of inflation readings. Only third quarter CPI-W readings (July through September) count for COLA for years to come. The other nine months can be useful in identifying trends, but ultimately it does not affect whether or not Social Security recipients will receive a raise. This is why we are currently at the most important time of the year for beneficiaries.
If the average CPI-W reading for the third quarter of the current year increases from the average CPI-W reading for the third quarter of the previous year, beneficiaries will receive an increase in proportion to the percentage increase, rounded to the tenth of one percent. In 42 of the last 45 years, inflation has been present and beneficiaries have received an increase in benefits the following year.
In the rare event that the overall price of goods and services (as measured by the CPI-W) declines from year to year, the benefits remain unchanged. Fortunately, Social Security payments cannot go down because of deflation.
This could be one of the smallest COLAs in history
A few months ago, at the height of the 2019 coronavirus disease (COVID-19), non-essential business closures across much of the country, deflation had taken hold firmly and it seemed quite likely that, for for only the fourth time in history, social security beneficiaries would not receive COLA. But a surge in inflation since June has changed the outlook for Social Security’s COLA 2021, but not significantly.
Earlier this month, the BLS reported an August CPI-W reading of 253.597, 1.39% higher than the August 2019 CPI-W reading. of the CPI-W readings for the last two months (July and August) and comparing this figure to the average CPI-W reading for the third quarter of the previous year, we reach an increase of 1.16 %, which would be rounded to 1.2%. Note that we are still waiting for the September inflation reading, so this is not a complete data set yet.
Assuming we see a continuation of the steady rise in inflation that has been present over the previous three months, Social Security’s 2021 COLA is expected to reach 1.3% or 1.4%. A COLA of 1.3% would equal the second smallest positive increase since 1975, while a 1.4% increase in COLA would equal the third smallest increase in history.
What payment increase are we talking about? Based on the $ 1,517.44 that the average retired worker received monthly in August 2020, a COLA of 1.3% to 1.4% would equate to $ 20 to $ 21 of extra pay per month, or about $ 240 to 250 $ per year. It’s not really an increase.
But wait, it’s getting worse
While any increase is better than what happened in 2010, 2011 and 2016, when no COLA was transmitted at all, a COLA of 1.3% to 1.4% is not going to do much. – something for retired workers. Indeed, the purchasing power of social security income has declined quite steadily over the past two decades, and it will almost certainly continue into 2021.
You see, the CPI-W is supposed to provide an accurate measure of the inflation that Social Security recipients face. But it does a terrible job in that regard, mainly because it’s an index that tracks the spending habits of urban and office workers who are often of working age. Seniors and working-age Americans spend their money very differently. Important expenses for seniors, such as health care services and housing, are weighted less in the CPI-W than they should. At the same time, lower costs, such as education and clothing, are given more weight. As a result, the purchasing power of Social Security income for seniors has fallen by 30% since 2000, according to an analysis by the Senior Citizens League.
Until August, the 12-month unadjusted inflation rate for health care services was a robust 5.3%, according to BLS data for the Consumer Price Index for all urban consumers (CPI -U), an inflationary measure similar to the CPI-W. Meanwhile, housing inflation stood at 2.3%. These two major expenses for seniors are climbing at a faster rate than next year’s estimated COLA.
Recipients should expect an “increase” in 2021, but what they can buy with their social security income will decline again.
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