Every month, Social Security divvies out nearly 64 million benefit checks, many of which wind up in the hands of retired workers. More than 3 out of 5 of these retirees lean on their benefit to account for at least half of their monthly income, with at least one analysis finding that over 15 million retired workers are pulled out of poverty as a direct result of this guaranteed payout. Suffice it to say that Social Security is very well our nation's most valuable social resource.

That's what makes next week so important. On Thursday, Oct. 10, 2019, these nearly 64 million beneficiaries are going to learn just how big of a "raise" they'll be receiving next year.

A Social Security card wedged between a pile of fanned cash bills.

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We're less than a week away from Social Security's 2020 COLA reveal

Since 1975, Social Security's annual cost-of-living adjustment (COLA) has been tethered to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is an inflationary index with eight major spending categories and countless subcategories, all of which have respective weightings and help to measure the inflation or deflation that urban and clerical workers in the U.S. are facing. This is why I referred to the increase in pay for beneficiaries as a "raise" (with quotation marks), because COLA is only designed to keep pace with the inflation beneficiaries are facing, not help them get ahead.

On the second Thursday of the month, the U.S. Bureau of Labor Statistics (BLS) releases inflationary data from the previous month. That means on Oct. 10, the BLS will release the CPI-W reading from September, which is the last puzzle piece needed to calculate Social Security's 2020 COLA.

You see, despite the BLS reporting inflation data each and every month, Social Security's COLA is only calculated using CPI-W readings from the third quarter (July through September). The other nine months can be useful for tracking price trends in certain categories, but they don't factor at all into the eventual COLA passed along to beneficiaries.

In order to calculate Social Security's COLA, the average CPI-W reading from the third quarter of the current year is compared to the average CPI-W reading from the third quarter of the previous year. If the average reading has risen, it signals year-over-year inflation, in which case beneficiaries will receive a "raise" that's commensurate with the percentage increase, rounded to the nearest 0.1%.

In the rare event that deflation occurs -- i.e., the average reading declines year over year -- benefits would remain static from one year to the next. Social Security payouts, thankfully, can't decline because of deflation.

A smiling senior woman holding a neat stack of cash in her outstretched hands.

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Social Security's 2020 COLA will likely be...

So, what does the 2020 COLA have in store for beneficiaries?

Last year, the average CPI-W reading in the third quarter was 246.352. But the two-month average for July and August of this year is 250.174. That's an increase of 3.822 points, or 1.55% from the previous year. Considering that the percentage change rounds to the nearest tenth of a percent, beneficiaries are looking at a rough increase of about 1.6%. With the average retired worker bringing home $1,473.42 a month, we're talking about a raise of less than $24 a month.

Mind you, we still don't have September's data yet. But what is worth noting is that last year's CPI-W readings rose in each of the important sequential months. In other words, August's reading was higher than July, and September's was higher than August. In 2019, August's reading actually dipped from July, which doesn't necessarily bode well for September.

Perhaps the biggest year-over-year difference can be found in energy prices. On the bright side, hurricane devastation has been minimal in the United States this year. The downside to that is it's meant little oil and oil refining disruption in the Gulf of Mexico and eastern seaboard ports. A handful of hurricanes led to substantial energy inflation in 2017 and 2018, but the wind has clearly been let out of the sails in 2019. With energy prices now a drag on overall inflation, beneficiaries are probably looking at an overall COLA of 1.5% or 1.6% in 2020, in my best estimate.

A worried senior man holding a mug in his right hand and sitting in front of a stack of clearly labeled bills on the table in front of him.

Image source: Getty Images.

The loss of purchasing power remains a big drag for seniors

However, as is often the case for seniors receiving Social Security, no amount of COLA is going to be sufficient to allow them to keep up with the true inflation they're facing. That's because the CPI-W is inherently flawed.

As I'd mentioned earlier, the CPI-W measures the spending habits of urban and clerical workers, which often are of working age and aren't receiving a Social Security payout. More important, these are folks that have markedly different spending habits than retired workers, which comprise more than 70% of all program beneficiaries.

A December 2011 BLS analysis that compared the CPI-W and Consumer Price Index for the Elderly (CPI-E) – a measure focused on the spending habits of households with persons aged 62 and over – found that CPI-E medical care spending was double that of the CPI-W, with housing expenditures also notably higher. What this means is that important costs to seniors, such as medical care and shelter, aren't being given enough weight in the CPI-W. Meanwhile, lesser important expenses, such as education, apparel, and transportation, bear more weight.

According to an analysis from The Senior Citizens League, the purchasing power of Social Security dollars has declined by 33% for seniors since 2000. Another way of putting this data is this: What $100 in Social Security income bought in 2000 now only allows retired workers to buy $67 worth of those same goods and services. Without reforming how the program's inflation is measured, seniors are liable to continue receiving inadequate "raises" regardless of the COLA they receive.