With the arrival of more inflation than we’ve seen in some time, retirees collecting Social Security can look forward to a raise next year.
It seems like no matter where you look prices are rising. From housing and fuel to groceries, precious metals and most any industrial commodities, almost everything feels more expensive lately. If you’re currently collecting Social Security, you may be feeling the sting of those higher prices. Fortunately, you can look forward to relief at the end of the year as Social Security payments will likely be adjusted higher.
As you may already be aware, Social Security and Supplemental Security Income benefits both receive annual cost-of-living adjustments (COLA) to ensure that the benefits keep pace with inflation. Since the beginning of the last decade, however, those adjustments have been very low or nonexistent.
The annual cost-of-living adjustments for those collecting Social Security benefits over the last decade, per the Social Security Administration, are reflected in the table below (the table reflects the timing of increases to recipients and is based on inflation experienced the prior year):
That 16.5% sum of adjustments translates to a real increase of 17.7% when compounded, which represents an average annual adjustment of only 1.475%. If you were in the workforce and got a 1.5% raise every year for 10 years, you’d probably quit! Unfortunately, if you’re collecting Social Security, quitting isn’t on the table; you won’t find another government agency handing out other retirement income.
This year, however, all signs are pointing to a larger increase at the end of this year/beginning of next. That’s because adjustments are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is a monthly statistic published by the Bureau of Labor Statistics (BLS).
To smooth over the potential impact of short-term price hikes, the Social Security Administration averages the third-quarter three-month period (July to September) and compares the CPI-W for that period against the same period in the prior year. The percentage increase is then used to raise the benefits for those collecting Social Security at the beginning of the next year.
This table (courtesy of the SSA) shows the calculation that led to this year’s minor increase. So, if you’re collecting Social Security, what kind of increase should you expect to see for next year?
There’s no way to know for certain since BLS has yet to publish the CPI-W for this year’s third quarter, but we may be able to gain some insight from what’s been published thus far this year, which is the CPI-W for the first eight months. These numbers can be a little volatile, and the estimation is imperfect, but the first eight months of 2020 pointed to a 1.1% benefit increase, which was in line with the final 1.3% COLA.
After crunching the numbers for the first eight months of the year (which can be found at the CPI-W link above) and comparing them to the first eight months of last year, we arrived at an indicated benefit increase in the 4.3% range. Nobody can predict the future, and we could see wild price swings increase the COLA for those collecting Social Security or wipe it out completely, but if you’re feeling the sting of higher prices, the current conditions are pointing to a little relief coming down the line.
How important is the annual COLA to your retirement living?
*This post has been updated from a previously published version.