It may be a little early to think about the potential Social Security COLA (cost of living adjustment) changes for 2021, but the writing might just already be on the wall. The pandemic, which is wreaking havoc with every facet of our lives right now, is also now targeting next year’s potential adjustments in the COLA and Social Security payments. Not very good news, is it?
With inflation likely to barely register this year, forecasters say that there will simply be no Social Security COLA for 2021. The COLA, which will be officially set in October 2020, would be zero, zilch, nada, nil. And that means no change in benefits next year for millions of Social Security beneficiaries. That is a blow that many just can’t take.
Overall Falling Prices Right Now
Overall, consumer prices fell 0.8% in April 2020, the biggest decline since the Great Recession. But, and it’s a big one, some prices such as for food and in particular for meat and eggs are rising.
Yes, there have been dramatic drops in gasoline prices and clothing, car insurance/rentals and other travel-related sectors over the past several months and that may be good news for some. But while those in the businesses that have been hard hit may never recover, the fact of the matter is that COLA recipients are more concerned with food prices than they are with clothing and auto insurance costs.
The forecast for the year for the inflation rate is now seen coming in at about 0.3% or less right now, far below last year’s 2.3%.
How COLA Is Calculated
The Social Security Administration (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 urban dwellers’ consumer price index (which drives inflation reporting). The 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 and that is the final number that comes out in October and the one that is used for the new COLA. That number right now is seen as likely to be flat and that would mean no Social Security COLA for 2021.
Could It Even Be Worse Than That?
The answer is yes, it actually could be worse than just no increase! The rate could actually compute to a negative—yes it is possible—and that is called “deflation”.
Deflation means that the overall basket of goods that the government measures when computing the COLA would be negative, in other words, falling prices. Fortunately, for Social Security beneficiaries in 2021, the law says that Social Security COLAs cannot be negative so your benefits cannot be lowered even if that happens.
But, if there is deflation between the 2019 and 2020 quarters, the effect could affect the following years, even COLA in 2022.
Say this year’s inflation rate turns out to be -0.3%. In that case, the 2021 COLA would be zero. But the negative value will get deducted from the next positive COLA. In that case, if 2022’s COLA calculation calls for a 1.5% increase, recipients would only see 1.2% (1.5% – 0.3% = 1.2%). So as you can see, there is something here to be worried about. Although it is pretty rare, it can and does and has happened to COLA.
Deflation and Negative COLA
Negative inflation has happened twice before. The first time was 2009 when a -2.1% rate meant no 2010 COLA. Then it knocked down the January 2011 COLA from 1.5% to zero and carried forward one last hit on the January 2012 COLA which went from 4.2% to 3.6%.
It happened again when because of negative inflation there was no increase in the January 2016 COLA following a -0.4% inflation rate, and the January 2017 COLA fell from 0.7% to 0.3%.
Could we be just on the edge of deflation and the COLA impact right now?
Even If You Are NOT a Social Security Recipient, COLA Can Affect You!
Some companies build salary adjustments into their compensation structures to offset the effects of inflation on their employees. Cost-of-living adjustments, or COLA, are generally equal to the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, for a specific period.
Workers who belong to a union may have a cost-of-living adjustment, sometimes referred to as a cost-of-living allowance, built into their contract. One example is the COLA required for U.S. Postal Service workers. For most employees, though, cost-of-living adjustments are made at the discretion of their employer. But some employment contracts’ salaries or benefits are adjusted for inflation.
Cost-Of-Living Adjustments for Relocations
There is another type of cost-of-living adjustment not directly tied to the rate of inflation, but employers may offer it to make employees more willing to accept job transfers.
Sometimes an employee may transfer to a new city while maintaining the same job and receive a salary increase to offset the higher cost of living in the new location. An example is an employee who receives a salary increase because he is transferred from some less expensive market to Chicago or New York City, where consumer goods and services are more expensive.
I once sold my home to a worker who had transferred from Texas to New Jersey and he complained to me that he was paying three times the price for the house here than the one he was leaving in Texas. Of course he failed to mention that his salary was also being adjusted for the higher cost of living here and that if and when he decided to return to Texas (which he eventually did) he would sell it for a huge price just as I did (and eventually he did just that!).
If you are considering moving to another city to accept a new job, cost-of-living indices can be used as an indicator of how suitable a salary offer is relative to your current income and standard of living. Housing, food, and taxes vary between states and even regions. Living in cities, regions, and states with a lower cost of living usually mean your income will go further. Living in areas with a higher cost of living usually mean workers have less disposable income, or money in their bank accounts after paying for the basics and need higher incomes to live as well as they would in a less costly region.
Sometimes the term COLA is used to describe salary “adjustments” or allowances for workers, including military personnel, temporarily relocated to another city, region, or country. Though the idea is to compensate workers for a change in their welfare resulting from moving to a different location, the adjustment or bonus pay may be more accurately described as a per diem allowance to be used for a temporary and specific cost, such as a higher rent payment. The extra payment does not continue when the temporary assignment ends, whereas a true COLA for a permanent salary remains in place.
You might have thought that inflation was always a constant and at best keeping it low and controlled was just the way life goes. But deflation is real, and it isn’t always about food price changes and/or that prices for things drop because there are many influences inside our financial stability.
The phrase “cost of living” refers to the measure of the cost of sustaining a certain standard of living. Cost-of-living indices are used to compare salaries across different areas. A cost-of-living adjustment calculation is used to increase certain kinds of income, such as contracts, pensions, or government benefits, so they can keep up with increasing basic living costs, as represented by the CPI or cost-of-living indices. In general, cost-of-living adjustments to your salary will be determined by your employer. But for retired Social Security and the disabled recipients of government benefits, cost of living adjustments are vital to their survival.
If you are worried about the COLA for 2021 and its potential impact on you, now is the time to think ahead about it and prepare for it.
You can look at alternate ways to earn money. You can look at downsizing and ways to cut your expenses. You can work towards influencing your representatives to bolster programs like Social Security and Medicare so that COLA will have less impact on the costs of the things that really matter most to you if you are disabled or retired. Now is the time to do something positive about it.
Are you concerned about the Social Security COLA for 2021 and/or deflation? Have you thought about how you would deal with it? Do the words recession or depression cause you to plan right now for the financial “what ifs” that you may fear the most?