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Here's What It'd Take for Social Security's 2021 COLA to Be Bigger Than 2020's

By Dan Caplinger – Aug 16, 2020 at 11:59AM

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July's numbers made a big difference for money-strapped senior citizens.

Even in the best of times, life can be challenging for senior citizens living on fixed incomes. For most retirees, Social Security is the largest part of their financial support. The program is especially useful because its payouts adjust upward to reflect the inexorable rise in the prices that everyone has to pay for the goods and services they need.

Throughout much of 2020, there's been concern that the impact of the COVID-19 pandemic would mean that seniors wouldn't get an annual cost of living increase in their Social Security checks come 2021. That could have crushed millions of retirees who are already in extremely precarious financial situations. Now, though, it looks like Social Security recipients will indeed get a COLA at the beginning of next year -- and there's even a possibility that it could top the boost that they got back in January 2020.

Brass key on top of four Social Security cards.

Image source: Getty Images.

Why seniors were afraid they wouldn't get a Social Security COLA for 2021

As recently as two months ago, things looked bleak for Social Security recipients. A long period of deflation during the initial stages of the coronavirus crisis had sent the inflation index that the Social Security Administration uses to calculate annual COLAs down sharply. May's reading of 249.521 for the CPI-W measure of inflationary levels was down from year-earlier levels. Although Social Security will never cut monthly benefits even during deflationary periods, even a flat benefit would have left some financially fragile seniors unable to catch up.

Last month, June figures came out that at least gave some hope for a positive Social Security COLA in 2021. An unusual 0.6% leap in the metric for the month brought the CPI-W above where it had been in June 2019. Yet even with that rise, the size of the COLA still looked unlikely to be particularly impressive.

An even bigger inflationary boost

Earlier this week, the Bureau of Labor Statistics released July inflation figures. They brought another surprise in the form of a second straight 0.6% increase in the key price benchmark.

July's figure of 252.636 compares to a three-month average from July 2019 to September 2019 of 250.200. That's a rise of nearly 1%, and if August and September's numbers come in flat with July's, then that's what the 2021 COLA will be. That would be less than the 1.6% COLA Social Security gave in 2020, but it would at least provide some relief for stressed seniors.

Some believe, however, that inflationary trends aren't just a one-time phenomenon and could instead become more normal. If the CPI-W matches the recent 0.6% rises in August and September, then it would lift 2020's three-month average to around 254.150. That would be just enough to produce a 1.6% 2021 COLA, matching the 2020 figure.

Getting used to tight times

Unfortunately, Social Security recipients have gotten used to not getting much of a raise from Social Security. Since 2010, retirees have had to deal with three years in which they got no COLA at all, and six more when the COLA was 2% or less. Only twice did they get more sizable boosts -- and even then, COLAs of 2.8% and 3.6% aren't exactly like hitting the lottery.

No matter where 2021's COLA ends up exactly, it'll have only a marginal impact on benefits. Earlier this year, Social Security reported that its average benefit for retirees was $1,503 per month. A 1% COLA would add $180 per year to what people get from Social Security. A 1.6% COLA would represent a $288 annual increase to the average retirement benefit.

Social Security  is more important than ever, and regardless of the size of any benefit increase, recipients will appreciate whatever they can get. Rising prices aren't good news for people on fixed incomes, but a higher COLA would at least be somewhat of a silver lining.

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