The amount of a cost of living adjustment (COLA) for 2021 will be announced in October of this year. Realistically, it is still too early to know what will happen in our economy five months into the future.
While that is always the case, this year is even more dicey. With the stay-at-home orders, guidelines or suggestions that have essentially shut down the American economy based on fear of the COVID-19 coronavirus have left the future even more unpredictable. There are some states that did not issue any requirement to shut down most businesses and there are some states that are opening up their economy much more quickly than others.
With millions of Americans having filed for unemployment (and some collecting more money on unemployment than they did while working), it is difficult to know how quickly the economy will recover.
No COLA Increase in 2021?
To the extent that the first few months of the year are any indication, there is a possibility, even a probability, that there will not be a COLA increase in 2021.
A Social Security policy analyst for the Senior Citizens League, Mary Johnson, has concluded: “The recent unprecedented plunge [sic] oil prices have all but wiped out the prospect of a Social Security cost-of-living adjustment (COLA) for next year.”
The same analyst wrote, “This year’s study found a 3 percentage point gain in the buying power of Social Security benefits over 2019. That should indicate that most retirees may have seen at least some prices come down on certain items — such as lower electric bills, as well as lower prices on eggs, fresh fruits, and vegetables.”
COLA Does Not Match Retiree Expense Increases
Since 2000, Social Security COLAs have increased benefits by 53% but the prices of what retirees typically buy have increased by about 99.3%. Medicare premiums and out-of-pocket costs, housing costs, and homeowner’s insurance costs—have been the most rapidly-rising costs in the past year.
So far in 2020, there has been a decrease of 0.27% in the third quarter of 2019 over the relevant Consumer Price Index used to calculate any COLA increase.
As discussed in previous FedSmith articles, the Social Security COLA is based on the consumer-price index (CPI) for urban workers. Another CPI, known as CPI-E, tracks the spending of older Americans. The difference in these CPI measurements is largely in the cost of health care and housing. Medicare premiums and homeowners’ insurance often grow rapidly from year over year. The COLA adjustments do not take into account the larger percentage spent by older Americans on these expenses.
While no one knows how fast the economy will bounce back from the shutdown experience of the past several months, it will probably take longer to recover than it took to kill the booming American economy. In a nutshell, this increases the likelihood of no COLA increase for 2021.
Is There a History of No COLA?
It is not unheard of for federal retirees and Social Security recipients to not receive a COLA. Here is the recent history of federal employee pay raises and COLAs.
|Federal Pay Raise %||COLA %|
If there is no increase in the COLA for 2021, we would be reliving the experience of 2010, 2011 and 2016.
For those who may be wondering if the lack of a COLA would dictate federal employees not receiving a pay raise in 2021, these figures demonstrate there is not always a pattern of one group receiving an increase while another group does not receive an increase.
2020 will go down as an unusual year in American history. America has undergone new virus infections in the past and some of these new diseases killed a number of people. This is the first time that most of the economy has been voluntarily closed to try and stop the infection from spreading.
We do know that voluntarily closing large parts of our economy has a massive economic impact. Congress has also dramatically increased the federal debt in recent legislation. We do not yet know the ultimate impact of these actions. Right now, it does appear to increase the likelihood of not having a COLA increase in 2021.