Please ensure Javascript is enabled for purposes of website accessibility

Social Security Recipients Shouldn't Expect a "Raise" in 2021

By Sean Williams – May 24, 2020 at 6:06AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

For possibly the fourth time in the past 12 years, Social Security beneficiaries may not receive a cost-of-living adjustment.

This has been a terrible year for the U.S. economy and labor market. More than 36 million people have filed for initial unemployment benefits over an eight-week stretch, with the U.S. economy's record-long expansionary streak coming to an unceremonious end -- and the spread of the coronavirus disease 2019 (COVID-19) is wholly to blame.

But it's not just the U.S. economy that's threatened by the proliferation of the coronavirus. The more than 64 million people currently receiving Social Security benefits (over 80% of which are senior citizens) could be in for a rude awakening come October.

A person tightly grasping a Social Security card between their thumb and index finger.

Image source: Getty Images.

Social Security's October COLA announcement is a highly anticipated event

You see, during the second week of every October, the U.S. Bureau of Labor Statistics (BLS) releases its inflation data for the month of September. For the Social Security Administration (SSA), this is the last piece of the puzzle needed to determine the cost-of-living adjustment (COLA) in the upcoming year. Think of COLA as the "raise" Social Security beneficiaries receive to help them keep up with the rising cost of goods and services (i.e., an inflationary boost).

Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been the program's inflationary tether. The CPI-W has eight major spending categories and dozens upon dozens of sub-categories, each with their own respective weighting. Based on the price movement of various goods and services, a singular CPI-W reading is yielded each month. Whether it rises or falls dictates whether we're seeing inflation (rising prices) or deflation (falling prices).

Although the BLS reports CPI-W data every single month, the SSA only factors in CPI-W readings from the third quarter (July through September) when determining the upcoming year's COLA. If the average reading from the third quarter of the current year is higher than the average reading from the third quarter of the previous year, beneficiaries will receive a raise that's commensurate with the year-over-year percentage increase, rounded to the nearest tenth of a percent. Meanwhile, if deflation occurs and prices fall, monthly benefits remain static. Thankfully, benefits cannot decline due to deflation.

A neat stack of one hundred dollar bills wrapped up by thick chain that's locked into place.

Image source: Getty Images.

Here's why Social Security beneficiaries are unlikely to receive a "raise" in 2021

Over the past 45 years, Social Security recipients have seen their benefits go up 42 times (i.e., there was inflation in 42 of 45 previous years), with the exceptions being in 2010, 2011, and 2016, where no COLA was passed along. But based on recent BLS reports, it's looking like 2021 could be added to the list.

According to the April inflation data, released two weeks ago by the BLS, the Consumer Price Index for All Urban Consumers (CPI-U) -- a similar inflation measure to the CPI-W -- declined by 0.8%. That's the largest single-month decline since the height of the Great Recession in December 2008. Over the past 12 months, the CPI-U for all items is up a meager 0.3%. Assuming we continue to see the effects of coronavirus-fueled deflation hit numerous parts of the U.S. economy through May and beyond, the 12-month trailing data will likely register a decline in all-items pricing for the CPI-U and CPI-W.

Based on CPI-U data provided by the BLS, energy delivered a 17.7% decline in unadjusted pricing from the previous year, with gasoline prices down 32% and fuel oil off 33.2%. There were also sizable declines of 5.7% for apparel and 5.5% for transportation services in April. 

If there is hope for at least a small COLA in 2021, it could come from the trio of food, medical care services, and shelter. These categories respectively account for 16.35%, 7.43%, and 30.27% of the CPI-W's weighting, and over the unadjusted trailing 12-month period they've seen positive inflation of 3.5%, 5.8%, and 2.6%, respectively. Albeit it should be noted that shelter costs, which had been rising on a monthly basis, are flat in both March and April. 

While it's not written in stone that Social Security beneficiaries won't receive a COLA in 2021, the inflation data from April certainly seems to indicate that'll likely be the case.

A visibly concerned senior man with his hand on his forehead.

Image source: Getty Images.

Adding insult to injury

Unfortunately for the more than 64 million Social Security beneficiaries, not receiving a COLA in 2021 would simply magnify preexisting problems with the CPI-W.

Truth be told, the CPI-W doesn't do a very good job of tracking the real inflation that Social Security beneficiaries are facing. As its name suggests, the CPI-W tracks the spending habits of urban and clerical workers, many of which are of working age and not receiving a Social Security payout. This means that important expenditures to seniors, such as medical care and housing, aren't receiving nearly the weighting they should. Comparatively, less-important expenses, such as apparel and transportation, are netting more weighting in the CPI-W.

According to a recent analysis from The Senior Citizens League (TSCL), a Washington, D.C.-based nonpartisan group focused on promoting seniors' issues, the purchasing power of Social Security dollars has declined by 30% since 2000. That's a slight improvement from the 33% decline noted in last year's report from TSCL. Put in another context, what $100 in Social Security income used to buy in 2000 will only purchase $70 worth of those same goods and services today. 

For example, take note that while COLA might be 0% in 2021, medical care service inflation continues to advance faster than any major category. For seniors, medical care expenses (as a percentage of their total expenditures) are typically double that of urban and clerical workers, creating a clear disparity that's not being accurately factored into the annual COLA calculations.

Over time, it would not be surprising to see this loss in purchasing power grow larger, especially during years where no COLA is passed along to program recipients.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.