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).
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
| July | August | September | Average | |
| 2018 | 246.155 | 246.336 | 246.565 | 246.352 |
| 2019 | 250.236 | 250.112 | 250.251 | 250.2 |
| 2020 COLA: | 1.6% | |||
| COLA Calculation for 2021 | ||||
| 20-June | 251.054 | If 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…
