For tens of millions of Americans, no program is more important to their financial well-being than Social Security.
According to the Social Security Administration (SSA), 62% of current retirees rely on the program to calculate at least half of their monthly income. In addition, more than 15 million retired workers are pushed out of poverty every month as a result of their guaranteed compensation payments, based on an analysis from the Center for Budget and Policy Priorities.
Social Security Beneficiaries Receive An “Extra”
Given the importance of the program, it should come as no surprise that the most anticipated announcement each year is the Social Security Administration’s release in October of next year’s Cost of Living Adjustment (COLA). Think of COLA as a “raise” that recipients receive in order to correct their payments to account for inflation.
Since 1975, the Consumer Price Index for Urban and Clerical Workers (CPI-W) has been an inflation constraint for Social Security. CPI-W has eight major spending categories and tens and dozens of subcategories, each with their own weights. Changes in the prices of goods and services covered by the CPI-W can be reduced to a single digit, which is used to determine whether inflation (rising prices) or deflation (declining prices) is occurring.
For Social Security, only the CPI-W readings from the third quarter (July through September) factor in the COLA calculation. While the other nine months of data can be helpful in setting trends, it has no bearing on whether or not recipients will receive larger monthly payments in the next year. If the average CPI-W reading from the third quarter of the current year is higher than the average CPI-W reading from the third quarter of the previous year, recipients will receive an increase in payments proportional to the annual percentage change, rounded to the nearest ten percent .
As reported on October 13th, Social Security beneficiaries can expect to receive 1.3% COLA when the calendar changes to 2021.
This will be the average monthly Social Security payment in 2021
The question is, what does 1.3% COLA really mean for beneficiaries? Let’s take a closer look.
As of September, 64.75 million people were in earning monthly Social Security payments, of whom nearly 46.1 million were retired workers. The average entitlement of a retired worker last month was $ 1,519.07. Based on recently released estimates from the SSA, monthly payments to retired workers are expected to reach $ 1,523 by December 2020. And given the COLA jump of 1.3%, it will increase by $ 20 to $ 1,543 in January 2021. In other words, average Retired Worker, you’ll get an additional $ 240 for the full year of 2021.
For disabled workers, the increase will be slightly less robust, in nominal terms. All recipients are set to receive 1.3% of the Employment Assistance Act (COLA), but the program of 8.25 million disabled workers only returned home $ 1,259.12 a month as of September. By December, the Social Security Administration (SSA) estimates that this monthly amount will grow slightly to $ 1,261. Thus, 1.3% of COLA should lead to an estimated $ 16 monthly increase by January 2021, pushing the average disability worker benefit up to $ 1,277.
SSA provides a number of other estimated average return scenarios beyond 1.3% COLA that may be relevant to you:
- An elderly couple, where both people receive benefits, should see an increase of $ 33 per month to $ 2,596 in 2021.
- Widows or elderly widows can expect an increase of $ 21 in their monthly payments to $ 1,453.
- A disabled worker with his wife and one or more children can expect their payments to rise $ 29 a month to $ 2,224 in January.
- It is estimated that a widowed mother of two will see her payments increase $ 39 per month to $ 3,001.
It’s a good news / bad news scenario for the beneficiaries
Given that the coronavirus pandemic has brought down the prices of various goods and services between March and May, it is actually great news that nearly 65 million Social Security beneficiaries are receiving COLA at all. The rebound in food inflation and the health increase in annual prices for shelter and Medicare services have ensured that benefits will rise in 2021. That’s good news.
But COLA correlations fell 1.3% for the second smallest positive increase since CPI-W was linked to the program in 1975. This poses a problem because inflation in shelter and healthcare costs – two of the most important expenditures for seniors – was easily overtaking by 1.3% on a subsequent yearly basis 12 months In other words, 1.3% of COLA will not reduce it to retired workers, and it is very likely that Social Security income will lose purchasing power again.
Earlier this year, the Senior Citizens League released an analysis showing that the purchasing power of Social Security income has decreased by a whopping 30% since 2000. This means that $ 100 of Social Security income has been able to buy. For 2000 now purchases identical goods and services for only $ 70. The disadvantages inherent in CPI-W ensure that older people lose purchasing power on their Social Security income for more years than not.
Benefits will rise across the board in 2021, but there is simply not much excitement for social security recipients.