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Why a 2% Social Security COLA for 2020 Just Isn't Happening

By Dan Caplinger – Sep 21, 2019 at 9:16AM

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It'd take a huge spike in prices in September for the annual cost-of-living increase to get even close.

For millions of Social Security recipients, the monthly checks are all or nearly all of the income they have. That makes it critically important for those on Social Security to make every dollar count, and when the program offers a higher payout, people take it -- and wish for more.

The most common way Social Security participants get extra money from the program is through its annual cost-of-living adjustment. At the beginning of each year, the Social Security Administration adjusts monthly benefits upward to reflect rising prices. 2019 was a good year for what's known as the Social Security COLA, as the 2.8% rise was the biggest in seven years. Yet the adjustment for 2020 isn't even going to reach the 2% mark, returning the program to the trend of puny increases that has been in place throughout the past decade.

The pieces are falling into place

It might seem early to be worrying about how big an increase Social Security recipients will get in January. However, the numbers that go into calculating the size of the COLA each year actually come out of economic data during the summer months.

Social Security card embedded in piles of coins.

Image source: Getty Images.

To determine how big a cost-of-living adjustment Social Security will get, you first have to look at a metric called the CPI-W, which is part of the series of Consumer Price Index figures that the Labor Department's Bureau of Labor Statistics produces every month. The federal government takes the CPI-W index readings for July, August, and September, and then it averages the three numbers together. It then compares that average against the corresponding average for those three months in the previous year. If the number is positive, then that percentage increase represents what the COLA will be for the following year, rounded to the nearest tenth of a percentage point.

We already have two out of the three numbers that'll go into the calculation. July's CPI-W figure came in at 250.236, and August's was 250.112. The average of 250.174 was higher than last year's three-month average of 246.352 by 1.55%. That suggests a 2020 COLA for Social Security that could be barely half what it was the previous year.

The one way COLAs could spike higher

We won't know the official increase for 2020 until September's inflation numbers come in. That's slated to happen on Oct. 10. In the past, the final month's figures have often made the adjustment amount rise slightly from what the initial two months would have suggested, and there's a reason to think that might happen this year.

Earlier this month, news that Saudi Arabian oil facilities got attacked by drones sent oil prices surging. Almost immediately, those increases were reflected at U.S. gas stations through rising gasoline prices. Economists have seen gas price rises have a significant impact on the overall CPI figures many times in the past. For instance, a spike in prices at the pump earlier in 2019 lifted the CPI-W by four-tenths of a percent in February and six-tenths of a percent each month in March and April.

Yet even an outsize rise in inflation wouldn't be enough to lift the 2020 Social Security COLA by much. Even if the CPI-W figure were to rise 0.6% in September, matching its largest monthly increases of the year, it would still leave the annual adjustment at just 1.7%. In order to reach the 2% mark, we'd need to see inflation rise a whopping 1.2% in September -- something we haven't seen since 2005.

Seniors, tighten your 2020 budgets

Many retirees were ecstatic about seeing a 2.8% raise in their monthly checks in 2019. Unfortunately for them, that's not going to happen again in 2020. Those who rely on their fixed income from the program need to prepare now for that disappointment -- and those who still have time to build up sources of retirement savings beyond Social Security should redouble their efforts.

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