Updated October 13, 2020
The 2021 Cost of Living Adjustment (COLA) increase for the 70 million Americans who rely on Social Security, VA disability, military retirement and other government benefits will be 1.3%. While a many were hoping for a much higher increase in 2021 this is positive news that there will be any increase given earlier projections of no increase at all. COLA increases are based on the inflation measurement period of the 3rd quarter (July, August, and September) compared to the previous 3rd quarter.
“The 1.3 percent cost-of-living adjustment (COLA) will begin with benefits payable to more than 64 million Social Security beneficiaries in January 2021.” ~ SSA statement
#BREAKING! Approximately 70 million Americans will get a 1.3% increase in monthly #SocialSecurity benefits and #SSI payments in 2021. Check our blog later this morning for more information: https://t.co/42WeesNNHV #COLA #2021COLA pic.twitter.com/BpK20EC2av
— Social Security (@SocialSecurity) October 13, 2020
2021 Cola Effective & Payment Dates:
- Retired military veterans, VA rates for compensation and pension for disabled veterans and surviving families will be effective December 1, 2020 and will be reflected on the first check to be paid on December 31, 2020.
- Social Security benefits will be effective beginning with the December 2020 benefits, which are payable in January 2020.
- Federal SSI & SSDI payment levels will be effective for payments made for January 2020.
2021 COLA (Cost-of-Living Adjustments) Increase Watch
Q3 (July-Sept.) 2020 COLA & CPI Summary
- The Q3 (July-Sept.) CPI-W (253.412) increased Year over Year by 1.28%.
- The September CPI-W (254.004) increased Year over Year by 1.18%
- The August CPI-W (253.597) increased Year over Year by 1.39%
- The July CPI-W (252.636) increased Year over Year by .96%
- The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in August on a seasonally adjusted basis after rising 0.6 percent in July. The monthly increase in the seasonally adjusted all items index was broad-based.
- A sharp rise in the used cars and trucks index was the largest factor, but the indexes for gasoline, shelter, recreation, and household furnishings and operations also contributed.
- The energy index rose 0.9 percent in August as the gasoline index rose 2.0 percent.
- The food index rose 0.1 percent in August after falling in July; an increase in the food away from home index more than offset a slight decline in the food at home index.
- The food index rose 0.1 percent in August after falling in July.
- The energy index rose 0.9 percent in August, its third consecutive increase.
- The index for all items less food and energy increased 0.4 percent in August after rising 0.6 percent in July.
- The all items index increased 1.3 percent for the 12 months ending August; this
figure has been rising since the period ending May 2020, when the 12-month
increase was 0.1 percent.
- The index for all items less food and energy increased 1.7 percent over the last 12 months.
Reasons for COLA Increase in 2021
- COVID-19 has created food and product disruption which could result in higher prices in Q3, a key measurement within the CPI-W. China has already seen their consumer inflation rise to its highest levels in years.
- Coronavirus fears and the economic impact may subside by the time the CPI-W measurement period begins in July.
- Continued tariffs from the U.S.-China tiff could lift the price of goods which is recognized in a higher CPI-W.
Reasons for a Lower Than Expected COLA Increase in 2021
- Travel, entertainment, dining, auto sales and much more will continue to be depressed.
- The limited deal to halt the Trade War with China could reduce the price of goods but effectively lower the CPI-W, a component of the calculation.
- U.S. economic growth will most likely slow due to uncertainties in the economy such as trade issues, an election year and most importantly the coronavirus pandemic.
Could Negative Inflation (Deflation) Affect 2022 COLA?
Deflation, as it applies to COLA, is a decrease in the CPI-W from the previous 3rd quarter to the next. Put another way, deflation is negative inflation. Fortunately for COLA beneficiaries in 2021, the law protects benefits from decreasing due to deflation. Meaning the COLA rates will be the same in 2021, if there is deflation.
However, deflation could impact 2022 because if there is negative inflation, it will get deducted from the next positive COLA. For example, assume this year’s COLA is -.5%. If 2022’s COLA calculation is a 1.5% increase, recipients would only see a 1.0% increase (1.5% – 0.5% = 1.0%).
This happened once before in 2011. For a COLA to have been triggered for 2011, the CPI-W would have had to not only increase, but increase beyond the highest point it had reached at the end of the 2008 third quarter. Although the CPI-W rebounded in 2010 it was not enough to surpass its 3rd quarter 2008 level, and hence no COLA increase in 2011.
Since 1975, when Social Security benefits were first indexed to the CPI-W, negative inflation has only happened twice. First in 2009 (no 2010 COLA increase) and again in 2015 (no 2016 COLA increase). The 2011 COLA value did increase but not enough to make-up for the deflation on the 2010 COLA.
Veterans’ Compensation Cost-of-Living Adjustment Act of 2020 (H.R. 6168)
On Thursday, September 24, the the Senate passed a cost-of-living increase for veterans benefits in 2021, so long as Social Security and COLA increase as well. This bill directs the VA to increase, as of December 1, 2020, the rates of VA disability, additional compensation for dependents, the clothing allowance for certain disabled veterans, and Dependency and Indemnity Compensation (DIC) for surviving spouses and children.
While Social Security benefits are automatically adjusted annually to keep pace with inflation, Congress must pass legislation every year to provide a cost-of-living adjustment (COLA) for veterans and surviving family members receiving these types of compensation from VA. Congress has done so for decades.
Note: This does NOT guarantee an increase in 2021 for veterans but rather guarantees veterans will receive an increase, if there is also a Cost-of-Living-Adjustment increase.
Why a COLA Increase May Not Help Social Security Recipients
If Medicare climbs at an equivalent or higher rate any increase may be offset by medicare premiums. Additional senior citizen household spending has typically outpaced COLA because the measurement to determine COLA doesn’t reflect the expenses that impact seniors most, like healthcare (not a heavy COLA calculation) and gas (a heavy COLA calculation).
Will Chained CPI Replace CPI-W?
Chained CPI is a new method for measuring inflation and was recently adopted with the new tax plan. Chained CPI dampens inflation by as much as .2 to .3 percent which has many advocacy groups concerned that this method will carry over to COLA. Few people are against a better measurement of inflation, in fact many advocacy group believe even the CPI-W is not the best measurement for retirees, however, Chained CPI many contend would be a step backward.
COLA (Cost-of-Living Adjustments) are for the following individuals or areas:
- Retired Military Veterans
- Disabled Veterans – See VA Disability Rate Tables
- Veterans’ Pension Benefits – Veterans Pension Rate Tables
- Survivor Benefit Annuitants – Survivors’ Pension Rate Tables
- Surviving Families of Veterans – Parents’ Dependency and Indemnity Compensation (DIC) Tables
- Social Security recipients
- Federal Civilian Retirees
- Supplemental Security Income (SSI)
- Social Security Disability Insurance (SSDI)
- Eligibility for Medicare Extra Help and Medicaid
- Federal & State food and housing assistance programs
|Quarterly CPI-W for 2019 thru 2020|
|Monthly CPI-W for 2019 & 2020|
|Month||2019 CPI-W||2020 CPI-W||YoY Increase/Decrease|
|2020 Official COLA Measurement – CPI-W
|Third quarter total||739.056||750.599|
|Average (rounded to the nearest 0.001)||246.352||250.200|
|Inflation According to the CPI-W||2.80%||1.60%|
|Quarterly CPI-W for 2018 thru 2019|
|Monthly CPI-W for 2018 & 2019|
|Month||2018 CPI-W||2019 CPI-W||YoY Increase|
The table below shows estimated future cost-of-living adjustments (COLAs) as determined by assumptions in the 2019 Trustees Report.
|COLA Estimates by Year
|2028 and later||2.6%|
The Board of Trustees regards the intermediate estimates as their best estimates.
The CPI-W takes into account eight major spending categories:
- Food and beverages
- Medical care
- Education and communication
- Other goods and services
How COLA is Determined
The Cost-of-Living-Adjustment (aka Cost-of-Living Allowance) is determined by the Bureau of Labor Statistics’ Consumer Price Index (CPI-W). It is based on the percentage increase of the CPI-W from the 3rd quarter of the previous year versus the current year’s 3rd quarter (July, August, and September).
Veterans who retire during the current calendar year will receive a temporary partial COLA due to already receiving a military pay raise in January.
- The COLA increase is only set at the CPI-W if the increase is less than 2 percent.
- If inflation is between to 2 to 3 percent then COLA is set at 2 percent.
- If the CPI-W is greater than 3 percent then COLA is set at 1 percent below the CPI-W.
COLA Versus Federal Pay Increases
Pay increases for current federal workers and COLA for retired workers often differ because they are based on changes in different economic variables.
Federal Pay increases are based on changes in private-sector wages and salaries. Increases in pay for federal civil service workers therefore are indexed to increases in the wages and salaries of private-sector employees. The objective of federal pay policy is to keep pay in the federal government competitive with pay in the private sector.
Cost-of-living adjustments (COLA) ensures that a retiree’s income will purchase the same amount of goods and services after years of retirement that it purchased at the start of retirement.
|Cost of Living Chart by Year (since 1975)|
|Money & Finance||COLA Adjustments|
|VA Disability Rates||Social Security|