2020 Social Security COLA May Not Be Good News

Update: The SSA has announced that the Social Security Cost-of-Living Adjustment (COLA) for 2020 will be 1.6% as predicted.

Every year around this time, anyone who gets a regular check from Social Security gets curious and also a bit nervous. That’s because they and I know that in just a few weeks, mid-October, the annual Social Security Cost-of-Living Adjustment (COLA) for 2020 will be announced. This comes as our lawmakers are looking for ways to expand and preserve Social Security, a task they have been avoiding now for decades. So perhaps for them, this news that Americans might be in for a smaller cost-of-living adjustment next year is good news. But not for anyone who depends on it.

For those relying on government benefits, the Social Security COLA 2020 may be a disappointment. While an increase is expected, it isn't very much.

According to a new estimate released by The Senior Citizens League on Thursday, the 2020 COLA is forecast to be a 1.6% increase which would come out to about $23.40 per month for the average beneficiary (the average beneficiary received $1,475 a month this year). That compares to the $40.90 beneficiaries received in 2019 which was a 2.8% COLA.

The final COLA for 2020 will be announced officially next month.

How Is the Social Security COLA Calculated?

Here is how it works: CPI-W readings are taken from the third quarter (July – September) of the current year, 2019. The final numbers can’t be calculated exactly until October.

The Social Security Act specifies the formula for determining each COLA. According to the formula, COLAs are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-Ws are calculated on a monthly basis by the Bureau of Labor Statistics. In other words, the U.S. Labor Department assesses inflation specifically more than one-half of it from households of clerical or wage occupations earners. At least one of the household’s earners must have been employed for at least 37 weeks during the previous 12 months.

This final data is then compared to the average CPI-W reading from the third quarter of the previous year (2018). If the average CPI-W reading goes up in 2019, then the difference, rounded to the nearest 0.1%, is what beneficiaries will receive as an increase in 2020. If the figure is lower, indicating deflation, no adjustment is made. That has happened several times over the past decade.

Two Major Problems with the COLA Formula

There are two glaring problems that flow from using the CPI-W to calculate inflation for the purposes of a Social Security benefits increase.

First, the CPI-W population represents only about 32% of the total U.S. population and second, that 32% it represents are a younger demographic than the elderly who are the ones mostly receiving Social Security benefits. Seniors are hardly the wage earners active in the workforce.

While it’s true that the CPI-W index does look at food and beverages, housing, apparel, transportation, medical care, and recreation and education, cost increases that hurt seniors are usually much different than those that hit the younger population.

While medical care is often among the most important spending categories for COLA recipients, the CPI-W often does not take into account the higher medical care and housing costs for seniors compared to younger people in the urban and clerical worker category. Expenses, such as apparel, transportation, and education are often less important for seniors than for other groups of people.

Maybe We Should Consider Ourselves Lucky If We See Any Increase?

The increases have been few or nil over the past decades, so if we get any increases in the COLA at all, we probably should consider ourselves lucky. Results for recipients since 2000 are not very good. Overall, The Senior Citizens League says Social Security benefits have lost 33% of their buying power since that time.

The COLA for 2018 was 2.8%, but it was largely perceived to be offset by increases in Medicare costs. There was a 0.3% increase in 2017, and no adjustment the year prior. Even during years with minimal, or no, COLA increase, retiree costs have continued to climb.

Here are the figures since the beginning of 2010:

Year AnnouncedYear ReceivedCOLA
200920100.0%
201020110.0%
201120123.6%
201220131.7%
201320141.5%
201420151.7%
201520160.0%
201620170.3%
201720182.0%
201820192.8%
20192020????

As of now, the best guess for the Social Security COLA 2020 increase is about 1.6%.

What About the Cost of Medicare Next Year?

Is there even more bad news? It could be because the Medicare Part B premium is expected to increase by $8.80 per month (compared with the $1.50 per month increase from 2018 to 2019) and that is taken right out of any Social Security check you receive. That means the effective increase is looming at around $14.60 to the average recipient each month.

If premiums rise by $8.80 or more, and if the cost-of-living adjustment is 1.6% as is estimated, then Social Security recipients with benefits of about $550 or less are at risk of seeing the Part B premiums take their entire COLA, leaving nothing extra to deal with other rising costs.

COLA Just Isn’t Realistically Keeping Up with Inflation

Cost-of-living adjustments, which began in 1975, are implemented in order to counteract the effects of inflation. But consumer costs appear to be rising at a much faster rate than the purchasing power of Social Security benefits.

According to research from The Senior Citizens League, between January 2000 and January 2019, COLAs increased Social Security benefits by about 50%. However, costs associated with the types of goods and services typically purchased by beneficiaries rose by more than 100% over the same timeframe.

Over the past year, some of the fastest rising costs have included prescription drugs and fresh fruits and vegetables.

The cost-of-living adjustment in 2019 was 2.8%, the biggest check increase in seven years. It boosted the average beneficiary’s check by $39 per month—or $468 per year. However, 78% of respondents in The Senior Citizens League’s survey said that monthly expenses rose by more than $39.

Presidential Hopefuls Are Talking About Some Changes

Massachusetts Democrat Sen. Elizabeth Warren, a 2020 presidential hopeful, released a plan to expand Social Security by hiking payroll and investment income taxes on wealthier Americans. In addition, Oregon Democrat Sen. Ron Wyden released details on Thursday for his plan to increase capital-gains taxes, where he says he would use the revenue to boost the solvency of the program.

Under the current funding measures, Social Security’s reserve funds are expected to be depleted in 2035, at which time the program would no longer be able to pay out benefits in full.

Just something else to worry about as if there isn’t already enough of that to do!

Final Thoughts

It’s easy to see and understand why it’s so very important to save towards your retirement while you work and earn income. Social Security is not and was never meant to be the sole source of income in retirement, but rather a “supplement” to it. No one in the U.S. can live comfortably on their Social Security check alone. Funding your IRA, company retirement plan, or having some alternate stream of income (preferably all of these) is the best way to plan and execute your retirement plan. Don’t ever ignore that strategy!

How do you feel about the projected COLA and the state of the Social Security Program? Are you prepared to face 2020 with a 1.6% increase? Are you prepared to face retirement now or in your future? What are you doing to make your retirement plan a success?

2 Comments

  1. Louise

    Thanks for a thoughtful article, Gary.
    A multi-pronged approach is needed to address the many complexities of social security. Unfortunately, our political and election processes don’t seem to be designed for fast action on issues like this. Here’s hoping for thoughtful representatives, and voters who take the time to really think through who they vote for, to either elect or re-elect!

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