Today, more than 64 million people are receiving a Social Security benefit each month. Among these recipients, more than 80% are seniors, many of whom are at least somewhat reliant on their monthly stipend from the program to make ends meet.
Given the relative importance of Social Security income to senior citizens, there's probably not a more anticipated event each year than the October announcement from the Social Security Administration of the following year's cost-of-living adjustment, or COLA. Think of COLA as the "raise" that beneficiaries receive to account for the inflation they've faced.
What you might find surprising is that Social Security's COLA for the upcoming year (2021) may be positively and negatively impacted by the novel coronavirus, dubbed COVID-19, which is sweeping through parts of China and has shown up in two dozen other countries around the world. As of Feb. 14, more than 49,000 cases of COVID-19 had been confirmed by laboratory testing, with 1,383 deaths resulting from the virus that originated in Wuhan, in the Hubei province of China, according to the World Health Organization.
How, exactly, does a virus that's predominantly manifested in China affect Social Security's COLA in the U.S., you ask? It all has to do with how the program's COLA is calculated.
Here's how the coronavirus could affect Social Security payouts in 2021
Since 1975, Social Security's inflationary tether has been the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is comprised of a number of major spending categories, along with dozens upon dozens of subcategories, which track the prices of a predetermined basket of goods and services. Each of these categories bears a percentage weighting that ultimately helps to paint a picture of the inflation that urban and clerical workers are contending with.
Where COVID-19 comes into play is the impact it's been having on two core spending categories within the CPI-W. While one category may be primed for deflation (falling prices), the other more important category looks as if it could see higher levels of inflation for the foreseeable future.
On one hand, the proliferation of COVID-19 in the second-largest country in the world by GDP has ravaged global crude oil prices. Through last weekend, West Texas Intermediate crude oil was down 15% year to date as demand for oil softened dramatically. While this may ultimately result in lower prices at the pump for consumers, it'll have a negative impact on the energy component within the CPI-W, which made up 8.072% of the CPI-W's total weighting, as of December 2019.
On the other hand, we've witnessed a sharp increase in food and household good inflation in China as COVID-19 has spread. China recently reported that its Consumer Price Index in January rose 5.4% from the prior year period, marking the fastest rate of inflation for the country in eight years. With the U.S. an importer of Chinese food and household goods, and China representing a key cog in the supply chains of many multinational companies based in the U.S., the supply disruption caused by COVID-19 could very well lead to higher food and household goods prices in the United States as 2020 wears on. As of December 2019, food and beverages accounted for 16.246% of the CPI-W's weighting, with the categories of personal care and housekeeping supplies combining for another 3.251%.
In other words, if COVID-19 leads to food and product scarcity, there's the possibility it could dwarf the decline in crude oil prices (based on the magnitude of aforementioned CPI-W weightings), leading to a higher-than-expected COLA for Social Security beneficiaries in 2021.
Before you get your hopes up for a higher COLA, remember this
Now, before you get too excited about a potentially higher COLA in 2021 -- Social Security's COLA has averaged a disappointing 1.4% per year over the past 11 years -- let me throw some cold water on the fire.
First of all, a higher COLA isn't necessarily a good thing for seniors. A higher COLA is often indicative of higher levels of inflation. This is why I referred to Social Security's COLA as a "raise," with quotations marks, because it's not a raise in the true sense of the word, but rather a means of truing up benefits to closely match inflation.
Secondly, but perhaps the bigger problem here, the CPI-W simply doesn't do a very good job of passing along an accurate COLA to seniors. As noted, the CPI-W tracks the spending habits of urban and clerical workers. The problem is that urban and clerical workers aren't usually seniors, and they're rarely receiving a retired worker benefit. This means that important expenditures to seniors, such as housing and medical care, aren't being given nearly enough weighting by the CPI-W. Meanwhile, lesser-important costs, such as apparel and education, have more influence.
The result, according to an analysis conducted by The Senior Citizens League, is a decline in retired workers' purchasing power of 18% over the past decade, and 33% since 2000. Even with a higher COLA, the inherent flaws in the CPI-W don't guarantee that seniors will be receiving a benefit that's commensurate with the inflation that they're facing.