Please ensure Javascript is enabled for purposes of website accessibility

Next Year's Social Security Raise Will Probably Be Meager, at Best

By Maurie Backman – Aug 8, 2020 at 8:02AM

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

It's time for an unfortunate reality check.

Seniors who rely on Social Security for the bulk of their retirement income tend to have ongoing financial concerns and constraints. To be fair, those benefits were never designed to sustain retirees by themselves. But many seniors enter retirement with inadequate savings, and instead depend heavily on Social Security to make ends meet.

It's for this reason that Social Security raises, known as cost-of-living adjustments, or COLAs, are crucial. COLAs are calculated from year to year based on third-quarter changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). When the CPI-W indicates that the cost of common goods and services has gone up, seniors become eligible for a raise. When the CPI-W declines or stays flat, Social Security benefits don't go up. (Thankfully, they also don't go down.)

For the 11-year period ending 2019, Social Security benefits increased 1.4%, on average. But during that time frame, there were three separate years when seniors got no COLA at all. And now, the fear is that Social Security either won't go up at all in 2021 or that the incoming raise for seniors will be negligible, at best.

Loose stack of Social Security cards

Image source: Getty Images.

Why seniors shouldn't expect much out of next year's COLA

The COVID-19 crisis has changed the way consumers spend, and while certain expenses -- namely, groceries -- have increased, the cost of gas and other common goods and services has gone down. Meanwhile, the year-over-year increase in the CPI-W was just 0.15% as of June. But it's the index's third-quarter data that really makes a difference, since it's used to determine what COLAs amount to.

Assuming the index doesn't budge all that much in 2020's third quarter, seniors may be looking at a meager 0.5% COLA, at best. When we apply that to the average monthly benefit of $1,503, that's an extra $7.50 a month -- hardly much to write home about. And at this point, that's really the best-case scenario. It's still quite possible that seniors won't be in line for a raise at all for 2021.

As such, those who rely heavily on Social Security must prepare for the fact that their income won't change substantially in the coming year. Many seniors have already cut back on spending in the course of the pandemic, not by choice but out of necessity. But if grocery prices continue to rise and stay that way, an absent or measly COLA could put a lot of older Americans in a worse financial position next year.

Annual COLAs are announced each year in October, so Social Security beneficiaries won't know for a while what their 2021 income will look like. But those in a position to boost their income should aim to do so once it becomes safe.

Right now, the COVID-19 pandemic is forcing a lot of seniors to stay home rather than work the part-time jobs they'd otherwise hold down to supplement their Social Security income. Many seniors don't have the option to work remotely, but those who do should take advantage of it to potentially avoid financial struggles next year.

The Motley Fool has a disclosure policy.

Related Articles

Premium Investing Services

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