Seniors who rely on Social Security for the bulk of their retirement income put themselves at a serious advantage: losing buying power to inflation. Those without another substantial income source, like personal savings, must instead sit back and rely on annual cost-of-living adjustments, or COLAs, to retain purchasing power as the price of most goods and services goes up from year to year.
Those COLAs, however, are not guaranteed, and over the past decade and a half alone, there have already been three different years with no Social Security raise at all. And unfortunately, we could see a repeat in 2021 thanks to COVID-19.
Will seniors get shortchanged yet again?
Because much of the country has been under stay-at-home orders for the past two months and change, and many people will continue working remotely and canceling travel plans well into the latter part of the year, the demand for gasoline has decreased substantially. That's good news when folks go to fill up at the pump, but it's bad news from a COLA standpoint.
COLAs are based on data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures price changes in the costs of common goods and services, like gasoline. When prices increase, so do COLAs. But when prices hold steady or decline, seniors risk losing out on a raise.
That may be the very situation we're looking at for 2021. While gasoline costs are only one factor measured by the CPI-W, they tend to be a strong COLA indicator, and while prices have begun to come back up as restrictions ease and Americans get more comfortable with the idea of leaving their homes, a second wave of COVID-19 cases could send prices falling once again.
Furthermore, with many Americans grappling with job loss and facing financial uncertainty, it's fair to say that we could see an overall decline in spending in the coming months, which could, in turn, be reflected in the CPI-W.
What will our economy look like this summer?
When it comes to determining a Social Security COLA, the real question we need to be asking isn't what the cost of common goods and services looked like in April or looks like today; it's what it will look like in July, August, and September. That's the CPI-W data that's ultimately used to figure out what COLAs look like, and as such, it's too soon to state with certainty that seniors won't be getting a raise for 2021.
But seniors would also be wise to plan for the worst on the COLA front. If summertime travel is halted further due to an early second wave of COVID-19 cases, that could destroy seniors' chances of seeing a raise in benefits in 2021. As such, those who get the bulk of their income from Social Security and are already squeezed financially should start making plans to cut back on expenses, if possible, in the coming months. To that end, COVID-19 may actually be helping. With seniors being a high risk group for severe health repercussions from COVID-19, many are already making a point to stay home, which may naturally lead to less near-term spending.
Furthermore, while now's certainly not the time to make any life-changing moves, seniors who are barely getting by on Social Security may want to think about future lifestyle adjustments, like downsizing or moving to parts of the country where the cost of living is lower on a whole and their benefits can do more. Even if a modest COLA comes in for 2021, it doesn't change the fact that Social Security was never meant to sustain seniors in the absence of other income, and that's something beneficiaries may need to come to terms with sooner rather than later.