For tens of millions of Americans, there isn't a program that bears more importance to their financial well-being than Social Security.
According to the Social Security Administration (SSA), 62% of current retirees lean on the program to account for at least half their monthly income. Additionally, more than 15 million retired workers are pulled out of poverty every month as a result of their guaranteed payout, based on an analysis from the Center on Budget and Policy Priorities.
Social Security beneficiaries are getting a "raise"
Given the program's importance, it shouldn't be a surprise that the most anticipated announcement each year is the Social Security Administration's October release of the upcoming year's cost-of-living adjustment (COLA). Think of the COLA as the "raise" that beneficiaries receive to true-up their payouts to account for inflation.
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been Social Security's inflationary tether. The CPI-W has eight major spending categories and dozens upon dozens of subcategories, each with their own respective weightings. The price changes for goods and services covered by the CPI-W can be boiled down to a single figure, which is used to determine if inflation (rising prices) or deflation (falling prices) is occurring.
For Social Security, only the CPI-W readings from the third quarter (July through September) factor into the COLA calculation. While the other nine months of data can be useful in identifying trends, they don't have any bearing on whether or not beneficiaries will pocket a bigger monthly payout in the upcoming year. If the average CPI-W reading from the third quarter of the current year is higher than the average CPI-W reading from Q3 of the previous year, beneficiaries will receive a payout increase that's commensurate with the year-on-year percentage change, rounded to the nearest tenth of a percent.
As reported on Oct. 13, Social Security beneficiaries can expect to receive a 1.3% COLA when the calendar changes over to 2021.
This will be the average monthly Social Security payout in 2021
The question is, what does a 1.3% COLA really mean for beneficiaries? Let's take a closer look.
As of September, 64.75 million people were netting a monthly Social Security payout, of which nearly 46.1 million were retired workers. The average retired worker benefit last month was $1,519.07. Based on recently released estimates from the SSA, monthly retired worker payouts are expected to hit $1,523 by December 2020. And factoring in a 1.3% COLA jump, that will increase by $20 to $1,543 in January 2021. In other words, the average retired worker is going to net an extra $240 for the entirety of 2021.
For disabled workers, the increase is going to be a little less robust, in nominal terms. All beneficiaries are set to receive a 1.3% COLA, but the program's 8.25 million disabled workers were only bringing home $1,259.12 a month as of September. By December, the SSA estimates this monthly payout will grow slightly to $1,261. Thus, a 1.3% COLA should result in an estimated monthly increase of $16 by January 2021, pushing the average disabled worker benefit to $1,277.
The SSA provides a number of other estimated average-payout scenarios following the 1.3% COLA that may be relevant to you:
- An aged couple, where both people are receiving benefits, should see an increase of $33 a month to $2,596 in 2021.
- Aged widows or widowers can expect a $21 increase to their monthly payout to $1,453.
- A disabled worker with a spouse and one or more children can anticipate their payout to rise $29 a month to $2,224 in January.
- A widowed mother with two children is estimated to see her payout increase $39 a month to $3,001.
It's a good news/bad news scenario for beneficiaries
Considering that the coronavirus pandemic sent the prices of various goods and services screaming lower between March and May, it's actually fantastic news that the nearly 65 million Social Security beneficiaries are receiving a COLA at all. A rebound in food inflation and healthy upticks in year-over-year prices for shelter and medical care services have ensured that benefits will move higher in 2021. That's good news.
But a 1.3% COLA ties for the second-smallest positive increase since the CPI-W was tethered to the program in 1975. That's problematic because inflation for shelter and healthcare costs -- two of the most important expenditures for seniors -- has been handily outpacing 1.3% on an annualized trailing-12-month basis. In other words, a 1.3% COLA simply isn't going to cut it for retired workers, and their Social Security income is very likely to lose purchasing power once again.
Earlier this year, the nonpartisan senior advocacy group The Senior Citizens League released an analysis showing that the purchasing power of Social Security income had declined by a whopping 30% since 2000. That means what $100 in Social Security income used to be able to buy in 2000 can now only purchase $70 worth of identical goods and services. Inherent flaws with the CPI-W ensure that seniors are losing purchasing power on their Social Security income more years than not.
Benefits are going up across the board in 2021, but there's simply not a lot to be excited about for Social Security recipients.