The Strange Reason's 2020 Social Security COLA may be higher than expected – The Fool Motley

With regard to social security, there may be no more follow-up figures from more than 63 million of its current beneficiaries than the annual cost of living adjustment, or COLA.

Consider COLA as the "stimulus" passed on to recipients, designed to allow them to track inflation (ie the rising cost of goods and services). Every year, in the second week of October, the Bureau of Labor Statistics (BLS) releases its September Inflation Report, providing the latest puzzle to the Social Security Administration for calculating the type of increase, or COLA, that the beneficiaries will receive. the year to come.

Here's how to calculate COLA on your own

Although it may sound a little complicated, everyone can calculate the social security COLA, and I promise you that it does not take a higher degree in calculus.

Since 1975, the COLA Social Security has been linked to the consumer price index for employees and clerks in urban areas (CPI-W). The CPI-W includes eight broad categories of expenditures, but dozens of dozens of subcategories, each with its own weighting. When the BLS reports inflation data in the second week of each month for the previous month, it also reports an overall CPI-O reading that can be used by anyone to determine the LCA.

Here is the interesting aspect of the calculation of COLA: only the months of the third quarter count. This means that the CPI-W readings for July, August and September will be used to calculate COLA for the coming year, the remaining nine months not being taken into account in the calculation at all.

To calculate COLA, you simply need the average CPI-W readings for the third quarter of the current year (add CPI-W readings from July, August, and September, then divide by three), as well than average readings of the third. quarter of the previous year. If the current year reading is higher, beneficiaries will receive an increase corresponding to the percentage increase and rounded to the nearest 0.1%. As I said, you do not need an advanced mathematics degree to calculate yourself the social security COLA.

The 2020 COLA Social Security could exceed estimates for a surprising reason

So, what can the 2020 COLA reserve for the beneficiaries? Keeping in mind that we are still a few weeks away from July, the first month that really counts for the COLA calculation, there are two published COLA estimates.

Mary Johnson, Senior Policy Analyst at the Senior Citizens League (TSCL), has forecast a COLA of 1.7% for 2020, which does not seem like much, but that would actually be one of the biggest increases in the last decade. Considering that the average retired worker earned $ 1,468.39 a month in April 2019, a 1.7% living allowance would increase his benefit check by about $ 25 a month, or $ 300 a year.

The other published projection comes in fact from the report of the social security board. On page 115 of the more than 260-page report, the interim cost model for directors predicted a COLA of 1.8% in 2019 (for the year 2020). Keep in mind that the directors report is generated weeks or months before its publication, which in 2019 was early April. This encourages administrators to make more guesswork than any estimates you might encounter.

But what you may not realize is that these two COLA estimates may underestimate the increase that is expected of beneficiaries next year. Indeed, tariffs associated with the US-China trade war, and perhaps even recently announced tariffs on products imported from Mexico, could lead to higher prices for products imported into the United States. .

The purpose of the tariffs is to promote domestically produced goods. In other words, this is the way President Trump is forcing Americans to buy products made in the United States. But if consumers choose to continue buying products imported from China or Mexico, they will pay a higher price for these products. This higher price will be recognized by the CPI-W and could very well result in a higher COLA than expected in 2020.

A superior COLA is not necessarily a cause for celebration

Technically, fares are not the only unusual factor that can impact the social security COLA. Since the calculation is based on the third quarter CPI-O readings, we are in the middle of the hurricane season. Hurricanes are known to be disrupting the energy sector in the Gulf of Mexico or East Coast refineries, pushing up fuel prices and driving up the cost of living.

But a higher than expected COLA should not be celebrated. Indeed, if COLA increases significantly, the price of goods that older people buy probably also increases faster.

This is an important point to keep in mind: COLA is not designed to help recipients go ahead. Rather, it has been designed as a tool to keep beneficiaries at the same level as the rising cost of goods and services. Therefore, a higher COLA does not mean "going forward" – it simply means that beneficiaries have to face higher inflation.

This is bad news because seniors have consistently seen the value of their social security dollars dwindling over time. This is because the CPI-W does a poor job of accounting for really large costs for older Americans.

As noted earlier, the CPI-W measures the consumption patterns of urban workers and office workers, who have significantly different consumption patterns from those of the elderly. As a result, the significant costs for the elderly, such as housing and medical care, tend to be underrepresented in the calculation of the COLA, while the less important expenses, such as education, l & # 39; Clothing and transportation have a higher weighting. The final result, based on a TSCL analysis, is that 33% of the purchasing power of older people in social security has disappeared since the year 2000.

So, yes, Trump's tariffs on China and Mexico could result in a larger "increase" in 2020 for social security recipients, but that does not necessarily mean that these recipients will track the actual inflation at which they are faced.