Updated May 16, 2020
Here is a a way-too-early look at Social Security’s 2021 COLA. We are 2 months away from the beginning of the 2021 measurement period but here are the early indicators for a potential COLA increase in 2021. Right now it is looking more likely that there will not be cost-of-living adjustment for 2021 which means no increase in benefits for Social Security, Military Retirees, Disabled Veterans and other beneficiaries.
2021 COLA (Cost-of-Living Adjustments) Increase Watch
April 2020 COLA & CPI Summary
- The April CPI-W (249.515) declined Month over Month by .74%, the biggest decline since the Great Recession.
- The CPI-W dropped below the 2019 Q3 CPI-W (250.200) for the first time.
- The CPI for All Urban Consumers (CPI-U) declined 0.8 percent in March, the largest monthly decline since January 2015.
- A 20.6-percent decline in the gasoline index was the largest contributor to the monthly decrease.
- Indexes for apparel, motor vehicle insurance, airline fares, and lodging away from home all fell sharply as well.
- food indexes rose in April, with the index for food at home posting its largest monthly increase since February 1974.
- The food index rose in March, increasing 0.3 percent as the food at home index rose 0.5 percent.
- The index for all items less food and energy fell 0.4 percent in April, the largest monthly decline in the history of the series, which dates to 1957.
- The index for all items less food and energy fell 0.1 percent in March, its first monthly decline since January 2010.
Reasons for COLA Increase in 2021
- COVID-19 could create food and product disruption which could result in higher prices, 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
- The coronavirus may mean no social security increase in 2021.
- Oil prices are currently at an 18-year low which would have a negative impact on the energy component of the CPI-W.
- Prices of goods and services continued to plummet in April.
- Consumer spending may cool amid the coronavirus outbreak which has sparked a stock market sell-off and fears of a recession.
- 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.
2020 COLA (Cost-of-Living Adjustments)
The 2020 Cost of Living Adjustment (COLA) increase for the 68 million Americans who rely on Social Security, VA disability, military retirees and other government benefits will be 1.6%. An increase is good news but a modest increase compared to last year’s 2.8%. COLA increases are based on the inflation measurement period of the 3rd quarter (July, August, and September) compared to the previous 3rd quarter.
#BREAKING! Nearly 69 million Americans will get a 1.6% increase in monthly #SocialSecurity and #SSI benefits in 2020. Check #SocialSecurityMatters later this morning for more information: https://t.co/BDNvNs2Opi #COLA #2020COLA
— Social Security (@SocialSecurity) October 10, 2019
“The 1.6 percent cost-of-living adjustment (COLA) will begin with benefits payable to more than 63 million Social Security beneficiaries in January 2020. Increased payments to more than 8 million SSI beneficiaries will begin on December 31, 2019. ” ~ SSA statement
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, 2019 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 2019 benefits, which are payable in January 2020.
- Federal SSI & SSDI payment levels will be effective for payments made for January 2020.
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 care 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|
|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 than COLA is set at 2 percent.
- If the CPI-W is greater than 3 percent than 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|