What June CPI Data Say About the 2021 COLA

By on July 27, 2020 11:02 AM in Retirement with 0 Comments
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Notepad with columns of numbers written on it representing a budget next to a stack of cash and a calculator

Probably the most closely followed news on Social Security is the announcement of the annual cost of living adjustment (“COLA”). It is close to a senior’s version of Super Bowl Sunday.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 0.5 percent over the last 12 months to an index level of 251.054 (1982-84=100). 

 ~BLS July 14, 2020

The Reason to Pay Attention

Social Security uses these figures to adjust benefits (higher) to offset the impact of inflation on seniors’ benefits. Since 1975, Social Security has calculated the COLA based on the changes in the CPI-W in the third quarter. While the government releases CPI-W data every month, the COLA calculation only uses readings from the third quarter (July through September) in the formula.

To illustrate:

COLA Calculation in 2020

JulyAugustSeptemberAverage
2018246.155246.336246.565246.352
2019250.236250.112250.251250.2
2020 COLA:1.6%
COLA Calculation for 2021
20-June251.054If unchanged:0.3%
Actual data will be released in August, September and October
2020????

Be Patient

In the coming months, financial bloggers will be front-running the story in hopes of being right about the direction of benefits. At this point, the numbers suggest a smaller bump than last year, but understand if the numbers that came out in July are the start of a trend, checks will get a meaningful bump.  

In terms of the long-term stability of Social Security, the trustees believe that inflation is generally a good thing for Social Security. While inflation makes the cost of the program rise, they believe that workers negotiate wage increases faster than Social Security resets benefit levels. I had some doubts about that assumption even before the pandemic hit.

The drivers of the increase were energy and food prices. Energy is still lower, but June posted a significant rebound in pricing.

Continue to come back to FedSmith for updates…

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About the Author

Brenton Smith (A.K.A. Joe The Economist) writes nationally on the issue of Social Security reform with work appearing in Forbes, FedSmith.com, MarketWatch, TheHill.com, and regional media like The Denver Post.

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