Living on a fixed income is difficult and many US retirees rely on Social Security to provide all or most of their regular income. One of the particularly beneficial ways for social security to help retirees is that the monthly checks obtained by beneficiaries are adjusted higher each year to reflect the impact of inflation. While some argue that these increases do not really reflect the specific costs of retirees, they are nonetheless invaluable for those trying to make ends meet.
The cost-of-living adjustment that came into effect in early 2019 led to a 2.8% increase in benefits, the largest increase since 2012. However, it is still too early to know what will happen. the increase in benefits in 2020. to be, it seems very unlikely that any COLA matches what social security participants got earlier this year. Below, we will take a closer look at the magnitude of an increase in benefits for social security recipients.
How social security gives more money most years
The law governing social security requires that benefits be adapted to the evolution of prices on an annual basis. Focusing on changes in one of the consumer price index measures, in particular the CPI-W, the social security administration tries to take into account the impact of inflation on the pricing power of the beneficiaries.
The figures taken into account for the annual adjustment to the cost of living come from the three summer months: July, August and September. As inflation data comes from the Bureau of Labor Statistics, social security recipients can see how these numbers will produce the three-month average of 2019. The SSA uses this average and then compares it to the corresponding average. for the same period in 2018. The percentage difference defines the amount of adjustment based on the cost of living.
Where are the COLA going?
The three-month average for 2018 is established at 246,352, with a slightly higher trend over the three-month period. The corresponding average for 2019 will only be available in mid-October, when the last piece of the puzzle will be released in the form of the September CPI report.
However, the Bureau of Labor Statistics has just released its May inflation figures, and we can use it to determine at least a reasonable starting point. The CPI-W reached 249,871 in May. This represents an increase of 1.7% from 12 months ago and an increase of 1.4% from the three – month average for the summer months of 2018.
Where is inflation going?
As there are still several months before the final COLA is determined, it is reasonable to expect that the rate may increase from the current level of 1.4%. However, there are a few things to consider:
- Historically, the level of inflation has tended to cross highs and lows, followed by quieter periods of stable or even declining price levels. As the CPI-W recorded significant gains between January and May, we may be ready to consider more modest changes.
- Specifically, the rise in gasoline prices has largely contributed to the soaring of the CPI-O in early 2019. More recently, however, gasoline prices have surpassed and started to fall. If this continues during the summer months, the measure of inflation could then stop growing, and even a sharp drop from the May level is possible.
Unfortunately for fixed income retirees, modest COLA levels have become the norm rather than the exception to the rule. Over the past decade, social security recipients have had three years of absence from COLA, and several increases ranging from 1.5% to 2% have been observed. Such a result seems likely for 2020 if inflation remains positive but moderate over the next few months.
Start preparing for 2020
There is still time for the current situation to change and, with respect to inflation data, anything can happen. However, without radically changing what we have seen most often in the past, social security COLAs appear to be collapsing dramatically in 2020. Fixed income recipients should do their utmost to prepare for this eventuality.