New report predicts social security COLA 2020 will increase dramatically

Every month, more than 63 million people, 70% of whom are retired workers, receive benefits from the Social Security Administration. For the vast majority of them, the second week of October tends to give rise to one of the most important announcements of the year. It is at this time that, as a result of the September Inflation Data release of the Bureau of Labor Statistics, the Social Security Administration announces the announcement of the adjustment according to the cost of living for the coming year.

Think of COLA as the "increase" that recipients receive each year to reflect rising prices for the goods and services they collectively face. Since more than three in five retirees rely on their benefits for at least half of their income, this increase can be very important in determining if they can make ends meet.

How much can social security beneficiaries expect in 2020?

So what should be the size of COLA that beneficiaries should expect in 2020? Although most analysts have not yet speculated for the reasons I will come back to a bit later, a recently published report gives its perspective on the magnitude of a possible increase in 63 million Americans next year.

In April, the annual report of the social security administrators was published. While this report is primarily designed to provide legislators and the public with a short-term (10 years) and long-term (75 years) vision of the program and its many variables, an aspect that usually goes unnoticed is a glimpse under the radar of what they think that COLA will be in the very short term.

On page 115 of his more than 260-page report, the directors present the history of all the old COLAs, dating back to 1975, the year in which COLA was linked each year to the price index. consumption of employees and urban office workers (IPC). -W). Prior to 1975, increases in benefits due to inflation were arbitrarily transferred by special congressional votes. This page also lists a number of short-term screenings of the program until 2028.

Although directors continue to forecast an average COLA of 2.6% in its short-term interim cost model, forecasters also expect a COLA of 1.8% in 2019 for 2020. With the average retired worker reporting 1 $ 467.17 in March 2019, a COLA of 1.8% would mean an increase of $ 26.41 per month, or nearly $ 317 per year.

Before being too excited, keep this in mind

Considering that the CPI-W has experienced three years of deflation (ie a fall in prices) over the last ten years – a year-over-year price decline has the effect of stabilizing the benefits the next year – an increase of 1.8% in 2020 is actually the fourth largest increase in the last 11 years.

But before being too excited, keep in mind that we have not even reached the really important months for the COLA calculation (which is why most analysts have not yet made a prediction) . .

You see, the average IPC-W reading of the third quarter (July to September) is all that matters for the COLA calculation of Social Security, the remaining nine months playing no role. Of course, the months leading up to July can alert us to trends that could affect inflation in the third quarter, but the CPI-O readings between October and June are simply not taken into account in the calculation of the CPI-O. total cost of living. As we have not yet reached these months and the Board's report is often prepared well before the third quarter, the accuracy of its predictions is debatable.

Regardless of the 2020 COLA, you will probably not be happy

It should also be noted that while COLA is of vital importance to older Americans, it is also a blatant and flawed calculation with no easy solution.

As the name suggests, the CPI-W analyzes the spending patterns of urban and clerical workers, virtually none of whom receive benefits from the social security program. At the same time, it does not take into account the consumption habits of the elderly, who make up 70% of the beneficiaries of the program. As a result, significant expenditures for older people, such as medical care and housing, are often underweighted, while lower costs, such as education, clothing, and transportation, which are important for urban and clerical workers, have a higher weighting. In summary, the purchasing power of social security dollars continues to decline for most retired workers, regardless of their earnings per year.

One solution the Democrats are considering is to switch to the Consumer Price Index for Seniors (CPI-E) rather than the CPI-O. As the name suggests, the CPI-E only takes into account household consumption patterns of people aged 62 and over, thus more accurately representing the medical and housing costs faced older Americans. Unfortunately, the CPI-E has no support from Republicans, whose votes would be needed to alter the inflationary bond of social security in the Senate.

This means that we are stuck with the CPI-W in the near future, which means that a continuous loss of purchasing power is very likely, regardless of the nature of the increase being considered for 2020.