Yes, it’s a little early to be predicting what the Social Security cost of living adjustment (COLA) will be for 2021, but that hasn’t stopped the financial media from making some prognostications in recent days.
The Kiplinger Letter is forecasting that the 2021 Social Security cost-of-living adjustment will be below 1%, which would be a significant decrease from the already-low 2020 COLA increase of 1.6% that retirees and other beneficiaries are receiving this year. That raised the average $1,500 retirement benefit by about $24 per month.
That was itself a drop from 2019, when the COLA increase was 2.8%. The 2021 COLA won’t be officially set until October 2020.
As Kiplinger notes, the Social Security Administration (SSA) is required by law to prevent inflation from eroding the buying power of the benefits paid out to nearly 69 million Americans. It uses a Social Security COLA formula based on the consumer price index to adjust payouts every year. Since prices typically rise, payouts typically rise also. If prices ever fell, payouts would stay unchanged until prices catch back up again.
Back on April 5, The Motley Fool posted an opinion piece predicting there would be no COLA increase for 2021, which would mean monthly Social Security benefits paid would be the same in 2021 as they are this year.
“To preface my opinion here, we’re still months out from seeing pertinent data that will actually matter toward Social Security’s COLA calculation—the July through September CPI-W readings—so understand that the case I’m about to make is not set in stone,” wrote author Sean Williams. “But there are very good reasons to believe that, for only the fourth time since the CPI-W became the program’s measure of inflation, we’re going to see prices decline year-over-year.”
Williams continued to say the biggest drag, without question, on the CPI-W is going to be the hefty decline in the price of oil (U.S. crude oil futures actually turned negative on April 20 for the first time in history).
He added that history would also suggest no COLA next year is a real possibility. “Following the steepest recession this country has seen since the Great Depression between 2007 and 2009, Social Security registered two consecutive years without a COLA. A recession is not a guarantee that the prices for goods and services will fall, but it’s not uncommon to see deflation associated with a recession.”
Furthermore, Williams pointed out the Federal Reserve’s efforts to stabilize the U.S. economy and amid the coronavirus panic could take anywhere from three months to two years to have an impact, meaning it’s unlikely there would be a significant bounce in the U.S. economy, or at least with regard to inflation, by the time those all-important CPI-W months of July, August, and September roll around.
“As of right now, all indications would appear to point toward no COLA in 2021,” Williams concluded.
Then again…
Then after reviewing recently released March inflation numbers, The Motley Fool’s Dan Caplinger further opined April 19 that 2021 Social Security checks could get a surprise COLA boost after all.
“Based on the plunge in oil prices during February, it seemed likely that falling energy costs would lead to a complete lack of inflation this year over 2019, which is what goes into the calculation of how much of an increase Social Security benefits see. Yet the most recent inflation data showed a countervailing force that’s pushing prices higher—and that could lead to a positive COLA for 2021 after all,” Caplinger wrote.
“Energy prices are continuing to fall, with no clear relief in sight. That could still lead to a 0% Social Security COLA for 2021. But if food prices keep rising, then inflation at the dinner table could well deliver a positive COLA next year—even if it does nothing to benefit Social Security recipients in terms of their true purchase power,” he continued.
Caplinger explained that if food prices rise at a faster pace than the overall inflation rate and drive the COLA higher, it could end up costing those on Social Security more in extra expenses than they’d get from larger checks.
Seniors want higher annual COLA guarantee
A recent survey by The Senior Citizens League (TSCL), which has a strong track record of accurately predicting the next year’s COLA before it is official, found that the vast majority of retirees (85%) think Congress should modify Social Security to provide a higher annual COLA, and they support very gradually raising payroll taxes to pay for it.
“Older Americans feel the COLA does not adequately protect their Social Security benefits from rising costs, and a large majority want Congress to strengthen the COLA and Social Security’s financing, said Mary Johnson, a Social Security and Medicare policy analyst for TSCL.
COLAs have been at unprecedented lows for more than a decade, averaging just 1.4% annually. There was no COLA paid at all in 2010, 2011, and 2016, and only a 0.3% increase in 2017. In contrast, COLAs averaged 3% per year from 1999 to 2009—more than twice the average over the past 11 years.
When asked how Congress should modify the COLA, The Senior Citizens League’s survey found 38% support tying the annual inflation boost to a “senior CPI,” the Consumer Price Index for the Elderly (CPI-E), which tends to grow .25 percentage point more rapidly than the current CPI. Forty-seven percent support providing a minimum COLA guarantee of no less than 3%.
When costs during retirement grow faster than the COLA, that erodes buying power and Social Security benefits are worth less over time,” says Johnson. Research by Johnson has found that Social Security benefits have lost about one third of their buying power since 2000.
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Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
