For the nearly 65 million people benefiting from Social Security, October is the most anticipated month of the year. That’s when the Social Security Administration announces all the changes for the coming year. This includes an increase in full retirement age, higher taxation for those earning above, and an increase in retirement income check exemption amounts.
Of all these changes, none is more important than Social Security’s cost of living adjustment – the increase in benefits passed to recipients each year for inflation.
This is the most important time of the year for Social Security recipients
Since 1975, the Social Security Administration’s COLA has been defined by linking the program to the Consumer Price Index for Salary Workers and Urban Clerk Workers (CPI-W). CPI-W has more than half a dozen major spending categories and dozens of subcategories, each with a corresponding weight. Monthly, the Bureau of Labor Statistics reports the CPI-W as a single number – when compared to the previous year – that allows for a quick and clear determination of whether the prices of a predetermined basket of goods and services are taking place. increase or decrease. .
The Social Security COLA does not include year-round readings. The CPI-W figures from the third quarter of the current year (July to September) and the third quarter of the previous year are important in the COLA calculation. The remaining nine months may help determine trends, but it will not determine whether Social Security beneficiaries will receive a raise next year.
If the average CPI-W from the third quarter of the current year is higher than the average CPI-W from the third quarter of the previous year, the payout will increase. This “increase” is equal to the average annual increase in CPI-W, rounded to the nearest tenth. Since the BLS September inflation report is the final piece of the puzzle needed to calculate the COLA, the second week of October is always the time for beneficiaries to find out if they get more money.
How much will actual monthly benefits increase by 2021?
In 2021, the beneficiaries actually get a raise. Based on BLS September inflation report, Social Security recipients can expect their monthly benefits to increase by 1.3% by January. What does that really mean for the average Social Security beneficiary? Let’s take a closer look.
Of the approximately 64.8 million people currently receiving benefits, 46.1 million are retired workers. This is not a surprising number as Social Security is designed to protect the elderly, who are no longer able to finance themselves. By December, the Social Security Administration predicts the average retiree will make $ 1,523 a month in pensions. COLA 1.3% will bring the average retiree an additional $ 20 per month by 2021, or $ 1,543.
The next largest group of recipients after the elderly beneficiaries are the disabled. The SSA estimates that 8.25 million disabled workers will bring home an average of $ 1,261 a month by December. Applying a COLA of 1.3% to this figure increases the amount that workers with disabilities take home on average. getting around $ 16 a month to $ 1,277.
Social security also protects surviving workers. Nearly 5.9 million people are receiving survivorship benefits as of September. Although SSA did not give an estimate of median benefit to survivors in December, my personal expectation is that it will increase from 1,225. , $ 96 in September 2020 to around $ 1,229 by December. Using a 1.3% COLA would bring a roughly $ 16 increase in monthly payments to $ 1,245 next year.
Good / bad news for Social Security 2021
Considering that the 2019 coronavirus (COVID-19) pandemic caused the prices of many goods and services to drop from March to May, it’s actually a bit surprising that beneficiaries are getting COLA. The increase in food-borne inflation and rising prices in shelter services and medical care is responsible for the 1.3% increase that Social Security recipients will receive by 2021.
While any positive COLA is better than no COLA, there is a downside here. 1.3% COLA relates to the second smallest positive COLA since 1975 and it maintained an 11-year rise in anemia inflation. Since 2009, the annual COLA has been only 1.4%, with three out of 11 years having no COLA (i.e. deflation has occurred).
The problem for Social Security beneficiaries, and especially the seniors, is that the 1.3% COLA does not even come close to expanding their health care services and where inflation occurs. in. This persistent low or non-existent COLA chain means that retired workers continue to lose purchasing power.
Again, it’s good news when the recipient will get COLA in 2021. But when the boost happens, it will almost certainly be another year the net worth of a Social Security dollar drop.