Throughout the country, coronavirus cases are spiking. In fact, some public health experts are warning we may already be seeing a second wave, while others believe the first wave never ended.

This is obviously terrible news because it means hundreds of thousands of more people could get sick and even die. It's also very bad news for the economy, as states that started to reopen reverse course, and businesses are shut down again. But as bad as the effects of a second wave could be for everyone, Social Security beneficiaries especially are at risk of facing long-term financial consequences if a second wave happens now.

That's because this quarter is a key one that determines if the'y'll see an increase in their benefits next year.

Older woman with hands clasped looking worried.

Image source: Getty Images.

A second wave means consumer spending will fall at a critical time

To understand why Social Security beneficiaries will face outsized financial consequences if there's a second wave of COVID-19 now or in the near future, you need to know how cost-of-living adjustments (COLAs) work. 

Social Security beneficiaries get a cost-of-living adjustment once a year that raises their benefits to help them keep pace with inflation. But they only get it if prices are going up. And to determine if that's happening, the Social Security Administration (SSA) looks at the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Specifically, the SSA compares the CPI-W during the third quarter of the current year to the CPI-W during the third quarter in the prior year. That means they'll be looking at how prices during July, August, and September of this year compare with prices from last year. 

Unfortunately, since the country is already in a recession, and economic woes will likely get worse if there's a second wave of coronavirus, there's a very good chance prices could fall compared with last year. After all, there will probably be very low consumer demand for many of the key items accounted for on the CPI-W if people are locked in their homes, worried about catching a virus, and concerned about keeping their jobs if they aren't out of work already. 

If there's no increase in CPI-W this quarter, there will be no cost-of-living adjustment. And that's a big problem for many seniors. With the average Social Security benefit coming in at just $1,503 per month, benefits already don't provide enough to live on. And CPI-W isn't actually a very accurate measure of inflation on things seniors spend on the most, so Social Security benefits have already lost substantial buying power.

If there's no COLA this year, seniors could see their buying power fall even further. And because all future raises are based on a percentage increase from current benefits, the effects of that will be felt long-term. 

Social Security retirees need to be prepared for no COLA next year

Since there's a very good chance seniors will get no raise next year, retirees on a fixed income should start planning now for that possibility.

This likely means cutting your budget now, so you're ready if your spending power falls next year and so you can sock away some extra cash if you face shortfalls. Also, make sure you know how much you can safely withdraw from your investment accounts, as you don't want to take out too much money to compensate for Social Security benefits that are too small, only to find your accounts run short while you're still relying on them.

Future retirees should also be aware that COVID-19 could have an adverse long-term impact on Social Security for a number of reasons, and should make plans to save a little extra for retirement because there's a good chance these benefits will be smaller than anticipated by the time they leave the working world.