Look for the Social Security cost-of-living adjustment (COLA) to be 1.6% for 2020, estimates The Kiplinger Letter, down from the 2.8% COLA increase retirees and other beneficiaries received at the start of 2019. For 2021, The Kiplinger Letter is forecasting a COLA increase of around 2.0%.
What is a Social Security cost-of-living adjustment?
The Social Security Administration (SSA) is required by law to prevent inflation from eroding the buying power of the benefits paid out to more than 67 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.
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How is the 2020 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 adjustment for 2020 is only 1.6%, reflecting the low inflation environment at the moment. Much of the reason for this lower-than-normal inflation is that gasoline prices dropped 6% over that time, dragging down the overall figure. This is unlikely to be repeated over the course of the next year, and so inflation will likely pick up to about 2%, causing an upward bump in the 2021 Social Security COLA as well.
A rough rule of thumb for calculating the Social Security COLA estimate yourself: Price growth of most items will average around 2% every year. Since gasoline prices tend to fluctuate the most, take the percent change in gasoline prices that year, divide by 20, and add to 2.0. For 2019, that would be (-6)/20 = -0.3 + 2 = 1.7, close to our forecast of 1.6. Of course, a major pickup or downturn in the economy could drive inflation off its 2% normal trend. The SSA is scheduled to announce the official COLA adjustment for 2020 on October 10.
History of Social Security COLA adjustments, 2009-2019
- 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%