There's arguably not a social program on the planet that does more for retired workers than Social Security. This is a program that doles out 64 million benefit checks each month, 70% of which wind up in the hands of retired workers. Without Social Security, elderly poverty rates would be likely to shoot through the roof.
This reliance on Social Security to help make ends meet as either a major or minor source of income during retirement is what makes the annual cost-of-living adjustment (COLA) announcement in October so important. Social Security's COLA is viewed by the public as a "raise" designed to keep up with the inflation that beneficiaries have faced during the year. And, as has happened in all but three years since 1975, Social Security recipients will be receiving a boost to their payouts come January.
Here's how much the average retired worker will receive in 2020
As announced on Oct. 10, Social Security's COLA in 2020 is 1.6%, which is more or less par for the course with the average "raise" over the past decade. Considering that no COLA was passed along in 2010, 2011, and 2016, and 2017's COLA was a meager 0.3%, the smallest increase on record, a 1.6% increase in monthly benefits has to feel like a bit of a relief for beneficiaries.
But the important question is how this increase will translate into nominal dollars for retired workers.
As noted in the monthly published snapshot from the Social Security Administration (SSA), retired workers were bringing home an average benefit of $1,477.97 per month, as of November. When the December snapshot publishes next month, the average payout will likely rise by about $1 to $1,479 a month, which is what the SSA forecast when it released its Fact Sheet back in October. It's from this roughly $1,479 average monthly retired worker benefit in December that the 1.6% COLA will be applied for 2020.
For the average retired worker, this should translate into a monthly payout increase of $23.66 (almost $284 per year) to nearly $1,503. Thus, for the first time in history, the average Social Security retirement benefit will cross above the $1,500 threshold, as of January.
Three important things to remember about this upcoming "raise"
While an imminent increase in benefits can be exciting for program recipients, it's also important to keep a number of factors in mind.
1. You're probably not an average retired worker
For starters, understand that while Social Security's average retirement benefit in 2020 will be north of $1,500 a month, you're probably not average. Everyone has unique financial, marital, and health variables that matter to them, and which can influence when they begin taking benefits and how much they'll ultimately receive.
As you may already know, the SSA takes your 35 highest-earning, inflation-adjusted years into account when determining your payout at full retirement age. Having a higher-paying job for a longer period of time, and working for at least 35 years, if not longer, can certainly influence what you'll be paid from Social Security, as well as how much more you'll nominally receive from a 1.6% COLA.
Similarly, when you take your benefit matters, too. Claiming benefits prior to reaching your full retirement age will result in a permanent reduction to your monthly benefit, no matter how much you earned per year during your lifetime. This will also affect how COLA will impact your "raise" in the upcoming year.
2. COLA is a raise in name only
Secondly, you should fully understand that Social Security's COLA isn't quite the same as getting a raise from the program -- which is why I've been putting "raise" in quotation marks this entire time.
You see, while the SSA's purest intention is to capture the inflation that program recipients are contending with each year, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) does a very poor job of this. Even though the CPI-W has been the program's inflationary tether since 1975, the fact that it's tracking the spending habits of urban and clerical workers, rather than seniors, is where everything goes awry. Urban and clerical workers spend their money very differently from seniors, which results in Social Security's COLA calculation underweighting more important expenses, such as medical care and housing, and overweighing lesser-important costs, such as education and apparel. And according to The Senior Citizens League (TSCL), this leads to a continuous loss of purchasing power.
How bad, you ask? The purchasing power of Social Security income has declined by 18% over the past decade and 33% since 2000, per TSCL. As long as the CPI-W remains the program's inflationary tether, Social Security income will struggle to keep up with the actual inflation seniors are contending with.
3. Social Security cuts could be looming
Lastly, keep in the back of your mind that while benefits are moving up in 2020, they could just as easily hit the skids in about 15 years.
The 2019 Social Security Board of Trustees report, like the other 34 annual reports before it, proclaimed that estimated revenue collection over the next 75 years (defined as the "long term") would be insufficient to match outlays over that same period. By the trustees' prognostications, Social Security is facing a complete exhaustion of its $2.86 trillion in asset reserves by 2035, with another $13.9 trillion funding shortfall between 2035 and 2093. In other words, to maintain solvency, across-the-board benefit cuts of up to 23% may be passed along to retired workers.
Although lawmakers are aware of Social Security's shortcoming, political hubris has paralyzed progress on Capitol Hill. History suggests that Congress will, eventually, resolve Social Security's funding shortfall, but that it won't happen until the 11th hour. Thus, being heavily reliant on Social Security income to make ends meet during retirement remains a very dangerous proposition.