There's little question that we're going to be talking about 2020 for a long time to come. The unprecedented coronavirus disease 2019 (COVID-19) pandemic has completely upended societal norms and ravaged the economic landscape. In a four-month stretch, the unemployment rate has rocketed from a 50-year low of 3.5% to 13.3%, a level not seen since the Great Depression roughly nine decades ago.
Yet, what's often lost in the COVID-19 chaos is that it's not just working Americans who are suffering. Although senior citizens are, in many cases, lucky enough to receive a Social Security retired worker benefit on a monthly basis, they're not immune to the effects of the coronavirus pandemic. In fact, there appears to be an increased likelihood that Social Security beneficiaries won't receive a cost-of-living adjustment (COLA) in 2021.
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Here's how Social Security determines how much of a "raise" beneficiaries receive each year
Every year since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has acted as the Social Security program's inflationary tether. With only three exceptions over the past 45 years (2010, 2011, and 2016), CPI-W readings have resulted in a positive COLA being passed onto Social Security beneficiaries on an annual basis. Think of COLA as the "raise" that beneficiaries receive to keep them on par with the inflation they're contending with.
To determine how much of a raise Social Security recipients will receive, the average CPI-W reading from the third quarter of the current year (July through September) is compared to the average CPI-W reading from the third quarter of the previous year. You'll note that this means the CPI-W readings from October through June aren't taken into consideration. If the current-year average CPI-W reading has increased from the previous year, then beneficiaries will receive a COLA that's commensurate with the percentage increase, rounded to the nearest tenth of a percent.
In those rare instances where no COLA was passed along, thus signaling deflation (i.e., falling prices for goods and services), Social Security benefits remain static from one year to the next. Thankfully, Social Security benefits don't decline in the event of deflation.
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A Social Security COLA in 2021 looks unlikely
Although many of Social Security's 64.6 million beneficiaries are unaffected by the employment struggles tied to COVID-19 (after all, most recipients are retired or long-term disabled workers), they're still exposed to the inflationary and deflationary pressures tied to the U.S. economy.
Earlier this month, the U.S. Bureau of Labor Statistics (BLS) released inflation data for the month of May -- and it's not good news if you're a Social Security recipient who's hoping for a "raise" in 2021. Keeping in mind, once again, that May is not a month that counts toward Social Security's COLA calculation, the BLS reports that the CPI-W reading for May was unchanged prior to a seasonal adjustment, with the 12-month reading down 0.1%.
According to the detailed analysis of the Consumer Price Index for All Urban Workers (CPI-U) -- a fairly similar inflationary measure to the CPI-W -- energy has proved a major drag on prices over the past 12 months. Energy prices, as a whole, are down almost 19% on an unadjusted 12-month basis, with gasoline prices off almost 34%. Additionally, apparel and transportation services have seen their respective prices fall 7.9% and 8.7% over the unadjusted 12-month period. While there are pockets of inflation, such as food (up 4%) and medical care services (up 5.9%), they haven't proved enough to offset weaker prices and demand in other areas.
Furthermore, on an all-items basis, the CPI-U was down 0.4% in March, 0.8% in April, and 0.1% in May. With the U.S. economy and consumer spending both ramping up slowly, it looks unlikely that we'll see inflation take hold by the all-important third quarter. This would mean no COLA for Social Security recipients in 2021.
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This is actually a double whammy for seniors
On paper, the lack of a COLA wouldn't seem like that big of a deal. After all, if the CPI-W is meant to measure the changing price of a predetermined basket of goods and services, and that basket has fallen in price, then static benefits should be a small victory. But this proves far from the truth.
One of the biggest problems for senior citizens is that the CPI-W does a very poor job of reflecting their spending habits. As the CPI-W's official name suggests, it's an index that measures how urban and clerical workers spend their money. In many instances, urban and clerical workers aren't seniors, nor are they currently receiving a Social Security retired worker benefit. Ultimately, it means important expenditures, such as medical care and shelter, are rarely weighted appropriately, while less-important categories like apparel and transportation are given more weighting than they should receive.
According to a recently published analysis from The Senior Citizens League, a nonpartisan group focused on advancing issues affecting seniors, the purchasing power of Social Security dollars has declined by 30% since 2000. This decline is solely because the CPI-W doesn't do a good job of accounting for the inflation that seniors are facing. Even though a COLA is unlikely in 2021, this doesn't mean seniors aren't still contending with rising medical care costs or shelter inflation.
For seniors receiving Social Security, COVID-19 is a double whammy. It likely means no COLA in 2021, and it almost assuredly means a further decrease in the purchasing power of their Social Security dollars.
