The big day that 64 million people have been waiting for is nearly here. Next week, following the change of the calendar year from 2019 to 2020, Social Security beneficiaries will be receiving a "raise."
Who's ready for their Social Security benefits to increase?
This "raise," known officially as the cost-of-living adjustment, or COLA, is designed to take into account the inflation that Social Security beneficiaries contended with over the course of the year and true-up their payout, so to speak, so they're not losing any ground to inflation. In 2020, Social Security's COLA is 1.6%.
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COLA is calculated by comparing the average third-quarter reading of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the current year to the previous year. If the average Q3 CPI-W reading increases from one year to the next, recipients will receive an increase in their benefits in the upcoming year that's commensurate with this percentage increase, rounded to the nearest tenth of 1%. If, on the off chance deflation occurs and the average CPI-W reading falls from one year to the next, benefits remain static (i.e., they can't fall because of deflation).
So what's in store for Social Security recipients in 2020? Beginning in less than a week, the average retired worker should see their monthly benefit check rise by about $24 a month to an estimated $1,503, according to the Social Security Administration. Meanwhile, the average disabled worker and survivor receiving benefits should note respective increases in their monthly payouts of $20 and $19.
The 1.6% COLA that's being passed along to recipients in 2020 certainly appears modest, especially to those folks who've been receiving a Social Security benefit for longer than a decade. But if you look at the past 10 years, it's actually slightly above average. That's because deflation struck in 2009, 2010, and 2015, leading to no COLA being passed along in 2010, 2011, and 2016. Furthermore, in 2017, Social Security passed along a COLA of just 0.3%, the smallest increase in the 45-year history of the CPI-W being tethered to the program. Thus, 1.6% is actually better than par for the course over the past decade.
A larger monthly payout isn't necessarily a reason to celebrate
Unfortunately, for the 64 million beneficiaries currently receiving a monthly payout from Social Security, COLAs have become something of a bittersweet moment. That's because these "raises" have been doing a poor job of accurately accounting for the inflation that most program recipients are dealing with.
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Although former President Richard Nixon improved the process by which COLAs are passed along by signing the Amendments of 1972 into law (prior to 1975, increases to payouts were made arbitrarily by special sessions of Congress), he simultaneously doomed seniors by selecting the CPI-W as the program's inflationary tether.
The CPI-W, as its official name implies, is an inflationary measure that's focused on the spending habits of urban and clerical workers. Urban and clerical workers tend to be younger and most often aren't receiving Social Security benefits. Therefore, it should come as little surprise that they have markedly different spending habits than senior citizens, who happen to account for more than 4 out of every 5 Social Security beneficiaries.
With the CPI-W focused on urban and clerical workers, important expenditures to seniors, such as medical care and housing, which make up a significantly higher percentage of their monthly expenditures than younger adults, tend to be underweighted in the COLA calculation. Meanwhile, less important costs, such as apparel, education, and transportation, bear higher weighting. The end result is that retired workers, and seniors in general, aren't receiving an annual COLA that's on par with the inflation they're facing.
According to The Senior Citizens League, a nonprofit organization based in Virginia that aims to support and advance senior rights, the purchasing power of Social Security dollars has declined by 18% over the past decade for retired workers and 33% since the year 2000. This purchasing-power loss is solely because the CPI-W does a terrible job of accounting for the costs that actually matter to the program's core beneficiaries.
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But wait -- it gets worse
I wish I could say that this relatively persistent loss of purchasing power is all that seniors would have to contend with in the upcoming year, but it's not.
Next year, Medicare Part B premiums (the premiums tied to the outpatient portion of Medicare services) will be rising by nearly 7%, or $9.10 per month, to $144.60/month. That's up from a very modest $1.50/month hike in 2019 for Part B premiums on the back of a heftier 2.8% COLA.
For lower-income Social Security recipients, this substantially larger increase in Part B premiums from the prior-year period could gobble up most or all of their Social Security COLA increase. We're talking about millions of low-income Social Security recipients who might ultimately receive no nominal increase in their payouts, while the costs around them continue to climb.
There's no denying that the CPI-W is failing seniors. Unfortunately, even with both political parties on Capitol Hill agreeing that the CPI-W isn't working, there's too big of a political divide in Congress for a middle-ground solution to be agreed on. Thus, seniors can almost certainly expect ongoing losses to their purchasing power for the foreseeable future.
