For Social Security beneficiaries, the big day is just three weeks away. On Oct. 11, 2018, the Bureau of Labor Statistics (BLS) will release its September 2018 inflation data, and with that release, the Social Security Administration will announce the program's 2019 cost-of-living adjustment, or COLA. Think of COLA as the "raise" that recipients are given most years that takes into account the inflation they've faced.
How Social Security's COLA is determined
Since 1975, the measure that tracks the changing price of a predetermined basket of goods and services for Social Security has been the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). In total, eight spending categories and dozens of subcategories help determine how big of a benefit bump recipients will receive in the upcoming year.
However, the interesting thing about Social Security's COLA and CPI-W measurement is that it doesn't take into account a full year's worth of data. In fact, only the readings during the third quarter (July through September) are considered.
Here's how it works: The average reading from the third quarter of the previous year serves as the baseline, while the average reading from the current year is the comparison. Since it takes the BLS a little over a week to compile and analyze its inflation data, everyone has to wait until the second week of the following month to find out the actual CPI-W reading. If the average CPI-W reading rises year over year, then beneficiaries receive a raise that's commensurate with the percentage increase, rounded to the nearest 0.1%. If, by some chance, deflation sets in and prices fall from the previous year, as they did in 2010, 2011, and 2016, then benefits remain static from one year to the next. Thankfully, Social Security payouts can't fall because of deflation.
In August, the BLS released July's CPI-W data, showing a 3.2% year-over-year increase on an adjusted basis. Again, it's about the reading and not the percentage increase when making the comparison. Nonetheless, there were strong price increases noted within the energy category, as well as with shelter inflation.
Even more recently (last week), the BLS unveiled August's CPI-W reading, which featured a 2.9% increase from August 2017 on an unadjusted basis. Similar to July, higher energy prices were responsible for much of the inflationary increase. As an early guess, beneficiaries are looking at their best COLA in probably seven years in 2019.
Hurricane Florence might boost Social Security's COLA
But what you may not realize is that the 2% COLA Social Security passed along for 2018 wasn't expected to be anywhere near 2% by about mid-August 2017. Last year, it looked as if beneficiaries would receive an inflationary increase of around 1.5%. Then Hurricanes Harvey and Irma hit. Both of these life-changing events, while utterly terrible from a human perspective, disrupted oil and gas production, as well as refineries. In other words, they proved pivotal in sending energy prices higher, which is what triggered an uptick in COLA to 2% by the time the Social Security Administration made the announcement in mid-October 2017.
The thing is, it could happen again.
Last week, Hurricane Florence took direct aim at the Carolinas, hitting the United States as a Category 1 storm, but bringing with it torrential rains and storm surge. Its presence disrupted shipping channels in the Atlantic and certainly put the East Coast energy industry on edge. While storms in the Gulf of Mexico are generally considered to be far more disruptive to the energy industry than storms that impact the Eastern Seaboard, the effect isn't negligible.
While we don't know exactly how much of an impact Florence will have on the energy industry when all is said and done, this data, be it notable or negligible, will be included in the September CPI-W, which will be released on Oct. 11, 2018. Or, putting this in another context, it's possible that Florence's upward-lifting impact on energy inflation could result in a little extra money being put into Social Security beneficiaries' pockets next year.
Should the U.S. -- or, more specifically, the Gulf of Mexico -- be hit by any additional storms prior to the end of September, that too could cause an upward lift on the CPI-W, and therefore COLA.
The CPI-W rocks seniors like a hurricane
Unfortunately, while Florence could end up having a modest positive impact on Social Security's COLA for 2019, the longer-term picture is much bleaker, and it's all the CPI-W's fault.
One of the biggest problems with Social Security is that there isn't a way for an inflationary measure to make everyone happy. The issue with the CPI-W, as its name implies, is that it tracks the spending habits of urban and clerical workers, most of whom are of working age, and nearly all of whom are not receiving a Social Security benefit. Meanwhile, retired workers account for nearly 70% of the program's beneficiaries. In short, the CPI-W is flawed because it's going to give precedence to expenditures that simply don't matter as much to seniors.
Though the analysis is a bit dated, a BLS side-by-side comparison of the CPI-W and Consumer Price Index for the Elderly (CPI-E) in December 2011 (the CPI-E takes into account the spending habits of households with persons aged 62 and over) shows clear differences. Seniors spend notably more on housing and twice as much on medical care as urban and clerical workers do, as measured by the CPI-W. In turn, the CPI-W gives more precedence to categories like apparel, education, and transportation, which aren't as important to seniors.
The result has been a precipitous loss of purchasing power for seniors since the year 2000. And, truth be told, this purchasing-power decline is unlikely to abate as long as the CPI-W remains the program's inflationary tether. While Florence could provide a modest boost to COLA, the CPI-W is a hurricane for seniors that keeps blowing away any chance they have of keeping up with inflation.