Tens of millions of people rely on Social Security, and many of them get the bulk of their income from the program. For them, the annual increases in benefits that cost of living adjustments bring are crucial, because they often represent the only boost to income that retirees and others receiving Social Security ever get.
In most years, Social Security provides at least a modest COLA to increase the size of monthly checks for the following 12 months. With the COVID-19 pandemic having a huge impact on the economy, however, there's been considerable uncertainty about whether there'd be any Social Security COLA for 2021. As recently as May, it looked as though the chances of a boost to Social Security checks next year would be small. However, in the past month, a big boost to prices has signaled a much greater chance of putting some extra money in retirees' pockets.
An end to deflation
Social Security looks at a specific measure of inflation to determine the COLA for each year. Unfortunately for those seeking a big increase to their monthly checks, that inflation measure has seen dramatic declines recently. In March, what's known as the CPI-W fell 0.2%. It then followed that up with an even larger 0.7% drop in April, and May's number was flat. If that trend had continued, then there would've been no COLA for 2021.
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However, the CPI-W in June got a big boost. The figure rose 0.6% for the month, bringing it back into positive territory for the past 12 months.
What drove the gains was a reversal of previous downward price trends, particularly in the energy sector. Gasoline prices soared 10% in June compared to May, and prices of electricity and heating oil were also higher. In addition, food prices stayed relatively strong, especially in the meat, fish, and egg category.
A critical time for Social Security's 2021 COLAs
Until now, the monthly movements in inflation haven't really mattered for Social Security recipients. The Social Security Administration takes into account only the monthly readings for July, August, and September in making their COLA calculations. The three-month average for the year gets compared to last year's corresponding reading, and any percentage change gets reflected in the COLA.
June's CPI-W reading of 251.054 compares to a three-month average from July 2019 to September 2019 of 250.200. Therefore, if the inflation benchmark stays constant over the next three months, then Social Security recipients would get a modest 0.3% COLA for 2021. If prices continue to rise, however, then the size of the COLA could be larger. The sooner such price increases come, the greater the impact on the three-month average, and therefore the larger the upward adjustment to monthly Social Security checks would be.
Be careful what you wish for
The problem with COLAs is that they're designed to reflect higher prices that Social Security recipients pay. It's true that the CPI-W isn't a perfect match to the spending patterns of most senior citizens, and so if the things that boost that inflation measure don't in fact cost retirees much more money, then it's better to get the bigger COLA. In general, though, a high COLA tends to accompany more expensive goods and services that eat up the extra money quickly.
For those living check to check on Social Security, news of any growth in checks from a 2021 COLA would be welcome. It's not likely to be big, but at least it probably won't be nonexistent.
