Social Security cost-of-living adjustments (COLAs) are essential to seniors who rely on retirement benefits. Unfortunately, while COLAs usually aren't very big, next year's raise could be an especially small one.
In fact, an analysis by the Senior Citizens League suggests that seniors could be in for half the benefits boost in 2021 compared with the raise they got in 2020.
Will seniors get less than a 1% raise?
While the 2020 COLA offered retirees a 1.6% bump in their monthly Social Security checks, projections for next year suggest they'll get half that amount, with benefits rising by only 0.8%.
This gloomy forecast is based on an analysis of the data provided by the Bureau of Labor Statistics for the first quarter of 2018. The bureau publishes monthly consumer price indexes that measure changes in the cost of household goods and services. One of those indexes, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), is the metric used for the purpose of setting Social Security COLAs.
During the first quarter, falling gasoline prices put downward pressure on the numbers, so the CPI-W showed little increase in living costs compared with last year. And while the numbers could change by the third quarter (the key quarter used to set COLAs), this early data is still useful in identifying broader trends that could likely persist throughout the year.
Gas prices have an outsize impact on the CPI-W since they're weighted heavily in the calculation. So if they remain low, as many experts believe they will, the relevant July-through-September prices could very well result in a very low COLA. In fact, if the coronavirus economy results in deflation in other important spending categories, a small raise -- or none at all -- is the most likely outcome.
Seniors should prepare for a low COLA
If the projection of a 0.8% increase proves accurate, this COLA would be the lowest since the 0.3% raise seniors got in 2017. Retirees receiving this year's average benefit of $1,503 per month would get just $12 more per month. And if Medicare premiums rise, they might see no raise at all.
Such a small adjustment in benefits could also exacerbate the reduction in Social Security's buying power that's been ongoing for decades, largely driven by the fact that the CPI-W isn't actually a very accurate approximation of how retirees spend their money.
In light of the likelihood of a small COLA, seniors may wish to prepare for an almost nonexistent raise by saving or investing their coronavirus stimulus funds to shore up their emergency fund or to bulk up their retirement accounts.
And those readying themselves for retirement but who are still working would be wise to remember that benefits already are insufficient to provide full support without supplementary income from retirement investments, and small COLAs will simply make that situation worse.