Bad news: your 2021 social security COLA will likely be zero
Retirees face the financial struggle every day of having to live without a paycheck. With most people having only modest savings, Social Security is often responsible for most or all of what retirees receive each month. Knowing the importance of Social Security benefits, lawmakers have made the amount of monthly payments increase each year to cover the inevitable increase in the cost of living.
Unfortunately, these cost-of-living adjustments are often not large enough to meet the special costs that retirees have to pay. In some years, recipients of social security have not obtained any increase in their benefits at all. And based on what just happened in financial markets – and one market in particular – the outlook does not look good for those hoping to get their social security benefits increased in early 2021.
The rules governing social security COLAs
Each January, Social Security recipients see their payments adjust based on a particular set of U.S. government inflation numbers. The CPI-W measure of the Consumer Price Index is what social security laws look at to determine the COLA for a given year. The Social Security Administration looks at the CPI-W numbers for July, August, and September, and then takes the three-month average over the period. It then compares that number to the average for the same three months of the previous year. Regardless of the percentage of change, it becomes the COLA taking effect at the start of the following year.
In February, it looked like retirees could get at least a modest increase in their social security in 2021. With the CPI-W standing at 251.935, the adjustment if there was no more inflation by then in this summer would be 0.7%. If prices continued to rise at the same rate as over the past six months, the figure would likely be about double, or 1.4%.
A big price hit is coming
Since the last inflation figures came out, however, something big has happened: Crude oil prices have plunged. Due to a lack of cooperation between Russia and key OPEC countries like Saudi Arabia, oil production has increased dramatically, creating a glut at the same time as the coronavirus has crushed demand for energy. Experts expect gasoline prices to drop from around $ 2.40 per gallon recently to less than $ 2 per gallon in the near future.
We have seen these disruptions in the energy market before, and they have been difficult for the elderly who depend on Social Security:
- During the 2008 financial crisis, oil prices fell from over $ 150 per barrel to just $ 32 per barrel. This resulted in a decline of around 2% in the CPI-W over the 2009 measurement period, resulting in no increase in 2010. This decline was so large that even modest price gains the The following year were not enough to catch up, meaning that there is no COLA took effect in 2011 either.
- In early 2014, oil prices began to decline over two years, dropping from $ 110 to about $ 35 per barrel. In 2015, these figures were incorporated into the headline inflation figures, so that no adjustment to benefit payments appeared for retirees at the start of 2016. The COLA for the following year was only a minimum adjustment of 0.3%.
To be clear, it’s not like retirees get large sums of money, even in normal years. The largest increase over the past decade has been 3.6%, and there have been many more readings in the 1.5% to 2% range, including the COLA of 1.6% which is entered into force in early 2020.
The irony of 0% COLA
What is particularly unfortunate about the link between energy prices and Social Security COLAs is that the impact of weaker energy markets is greater in the CPI-W than for the typical retiree. . The price of gasoline affects working-age Americans much more than retirees, and the CPI-W weights reflect what young workers have to pay. In contrast, young people tend to be healthier, resulting in lower healthcare costs than the average retiree.
It’s not 100% certain that Social Security’s COLA for 2021 will eventually disappear entirely, but history suggests it’s likely. Since many retirees face much lower balances in their retirement accounts due to the recent market downturn, not getting an increase in Social Security would only add insult to injury.