Social Security is supposed to be an inflation-protected source of retirement income because seniors receive periodic cost-of-living adjustments. Unfortunately, the method used to determine if benefits go up is an imperfect one, as it relies on price changes reflected on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Since senior spending habits tend to differ from urban wage earners, benefits haven't been going up fast enough and have lost substantial buying power

Because of that, it was especially concerning when it appeared seniors might see no Cost of Living Adjustment (COLA) in 2021 due to coronavirus. See, the Social Security Administration considers only the months in the third quarter of the year when determining year-over-year price changes. With coronavirus having a deflationary effect, it looked at first glance as though prices would either fall or remain stable during the critical quarter, so no raise would occur in 2021. 

The good news is, this didn't happen. July and August saw rising prices, and while we don't have September's data yet, seniors are likely on track to get a COLA of around 1.2% to 1.4% next year. The bad news is, while this is better than no raise at all, it's not something to get excited about. 

Older couple looking at financial paperwork and using calculator.

Image source: Getty Images.

Social Security's 2021 raise is likely to be a disappointing one

Whether retirees see a COLA of 1.2% or 1.4%, it will be the lowest annual raise since January of 2017 -- and far below the benefit increases seniors received in recent years. Retirees got a 2% raise in 2018, a 2.8% COLA in 2019, and a 1.6% raise in 2020.

With retired workers receiving an average benefit of $1,517 as of August 2020, a 1.2% raise would add up to just $18.20 extra per month, while a 1.4% raise would give the average retiree about $21.24 extra dollars. 

But most seniors shouldn't expect to see even this much, as Medicare premiums are also projected to rise next year, and these are generally paid directly out of Social Security checks. In 2020, monthly premiums for Medicare Part B are $144.60, but the Medicare Trustees report indicated they'll most likely go up to $153.30 for 2021. This report was largely prepared before the effects of COVID-19 were known, so it's possible premiums could rise more next year or that premium increases could be smaller if the increase is capped by legislation

If premiums do go up as projected, though, most seniors will be looking at paying an extra $8.70 per month. That would mean a retiree receiving the average benefit only gets about $9.50 to $12.54 extra each month due to the COLA once the extra premiums are accounted for. 

Of course, this is certainly better than no raise at all, but seniors shouldn't count on this year's small COLA to help turn around the trend of benefits losing buying power. And with COVID-19 potentially hastening the day when Social Security's trust fund runs out and automatic benefit cuts occur, it's more important than ever for future retirees to make sure they're not over-relying on Social Security to provide them with the retirement they deserve.