The Kiplinger Letter is forecasting that the 2021 Social Security cost-of-living adjustment will be below 1%. The COLA, which will be officially set in October 2020, would be down from the 1.6% COLA increase retirees and other beneficiaries received at the start of 2020. That was itself a drop from 2019, when the COLA increase was 2.8%.
The Social Security Administration (SSA) is required by law to prevent inflation from eroding the buying power of the benefits paid out to nearly 69 million Americans. It uses a Social Security COLA formula based on the consumer price index to adjust payouts every January. Since prices typically rise, payouts typically rise also. If prices ever fell, payouts would stay unchanged until prices catch back up again.
How Is the 2021 Social Security COLA Calculated?
Specifically, SSA ties its adjustment for Social Security benefits to the wage earners’ consumer price index, which is similar to, but not exactly the same as, the more commonly reported urban dwellers’ consumer price index. National average prices are used, not regional. SSA also calculates the percent change between average prices in the third quarter of the current year with the third quarter of the previous year. The reason the fourth quarter isn’t used is because that number is typically not available from the U.S. Bureau of Labor Statistics until mid-January, and the SSA has to make its adjustment on January 1.
The inflation forecast for 2021 (using the “urban dwellers’s price index”) is only 1.0%, reflecting the impact of the COVID-19 pandemic. Prices of goods and services plummeted in March, and while the biggest declines have already happened, prices for travel and any activity that involves large gatherings (even restaurant dining) will continue to be depressed. Even a few potential price spikes from shortages won’t make up for that.
History of Social Security COLA Adjustments, 2009-2020
- 2020: 1.6%
- 2019: 2.8%
- 2018: 2.0%
- 2017: 0.3%
- 2016: 0%
- 2015: 1.7%
- 2014: 1.5%
- 2013: 1.7%
- 2012: 3.6%
- 2011: 0%
- 2010: 0%
- 2009: 5.8%