In relatively short order, coronavirus disease 2019 (COVID-19) has gone from a novel illness worth watching from afar to something that's prevalent in our own backyards.
With the World Health Organization declaring coronavirus to be a pandemic, and President Trump declaring COVID-19 to be a national emergency, it's become clear that this illness is going to change the world as we know it.
Many of these changes are highly visible and include school closures, sporting-event cancellations, bans on large gatherings, and a substantive increase in telecommuting in recent weeks. But there are other less visible impacts coronavirus is having on the United States, and the Social Security program is a prime example.
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Social Security's annual COLA announcement is highly anticipated
Right now, there are more than 64 million people that count on a Social Security benefit check each month. Many of these beneficiaries (80%-plus) are senior citizens, with a majority leaning on their Social Security payout to account for at least half of their income.
For Social Security recipients, there's probably not a more important or anticipated announcement each year than the mid-October unveiling of the program's cost-of-living adjustment (COLA) for the upcoming year. Think of COLA as the "raise" that beneficiaries receive that's designed to help them keep pace with the rising price of goods and services they're contending with.
Since 1975, it's been the job of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to be the program's inflationary tether. It has more than a half-dozen major spending categories, along with dozens upon dozens of subcategories, each with their own respective weightings, which help determine what levels of inflation or deflation urban and clerical workers are dealing with.
Over this 45-year span where the CPI-W has been responsible for determining Social Security's COLAs, there have only been three instances – in 2009, 2010, and 2015 -- where deflation reared its head and the average CPI-W reading during the third quarter of the current year fell from the average CPI-W reading from the third quarter of the previous year. Only CPI-W readings from July through September are taken into account when determining Social Security's COLA. These deflationary readings resulted in Social Security beneficiaries receiving no COLA in 2010, 2011, and 2016.
Well, folks, we could be in line for the fourth such occurrence, with coronavirus being directly to blame.
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Coronavirus might push Social Security's COLA to zero in 2021
As noted, mitigation efforts to stem the spread of coronavirus are unprecedented. Schools in various parts of the country are closed up to six weeks, while a number of major sports are suspended indefinitely. All of these efforts, while designed to keep our healthcare system from becoming overwhelmed with sick patients, will come at a cost to the U.S. (and likely global) economy.
Earlier this month, the U.S. Bureau of Labor Statistics (BLS) released its inflation data for February 2020, with the CPI for All Urban Consumers (CPI-U) showing a seemingly healthy 2.3% inflation rate over the trailing 12-month period. The CPI-U is a fairly similar inflation measure to the CPI-W, and I'm leaning on its data here purely for simplicity's sake.
As a whole, and on an unadjusted basis, food inflation was up 1.8% over the past 12 months, with shelter inflation rising 3.3%, and medical care service costs galloping 5.3% higher. With shelter representing the largest weighting in the CPI-U and CPI-W, this would appear to signal that Social Security beneficiaries are on track for a healthy COLA in 2021.
However, this inflation data comes before coronavirus significantly disrupted our normal way of life in March. More specifically, with IHS Markit projecting a record drop-off in global crude demand of 3.8 million barrels per day in the first quarter, and both Russia and Saudi Arabia engaging in a crude-pricing war, we've witnessed nothing short of a rout in the oil market in recent weeks. Even though the energy weighting in the CPI-W is smaller than the rating for say food expenditures and shelter, the sheer magnitude of the move lower in crude prices (down around 50% year-to-date, with most of the move lower occurring this month) is going to significantly weigh on near-term CPI-W readings.
Not to mention, the winds of recession are very much in the air as businesses big and small navigate through coronavirus mitigation efforts. It's not uncommon for prices to fall when recessions rear their head. But if one does occur as a result of the actions being taken to slow the spread of this illness, it's not inconceivable that it pushes Social Security's 2021 COLA to zero.
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One more thing...
To make matters worse, it's also worth pointing out that Social Security's COLA wasn't exactly lighting things up prior to the emergence of COVID-19.
According to an analysis conducted by Washington, D.C.-based senior advocacy group, The Senior Citizens League, the purchasing power of Social Security dollars has declined by 18% since the beginning of the previous decade and 33% since the year 2000. The reason? The CPI-W is a flawed inflationary tool.
While the CPI-W does a relatively good job of accounting for the spending habits of urban and clerical workers, urban and clerical workers spend their money very differently than retired workers, who make up the vast majority of Social Security recipients. The end result being that important expenditures for seniors, such as medical care and housing, which equate to a higher percentage of household expenditures than younger, working Americans, aren't receiving a large enough weighting. Meanwhile, lesser-important costs, such as apparel, transportation, and education, are netting higher weightings in the CPI-W. Ultimately, it means seniors aren't receiving a COLA that's representative of the true inflation they're facing.
With little hope that lawmakers will replace the CPI-W as the program's inflationary tether anytime soon, it means beneficiaries can expect to continue losing purchasing power on their Social Security income for the foreseeable future.
