In October, the Trustees of the Social Security fund will release the Cost of Living Adjustment (COLA) for 2021. The COLA increases Social Security benefits to offset the general rise in prices experienced over the last year. With an economy still suffering from the effects of the pandemic, the COLA is predicted to be flat (0%). The following is the rationale.
The Coronavirus lockdowns have caused widespread unemployment and lower wages for many that are working. Because few left their homes over the past few months, aggregate spending decreased. To encourage consumers to spend during the early phase of the recovery, many firms are relying on discounts to attract consumers to their businesses. The falling prices will likely lead to a decrease in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
To calculate the COLA, the trustees will average the rate of change between the third quarters of 2019 and 2020 based off the CPI-W. As you may recall, 2019 was a year of tremendous economic growth for our country. While the economy appears to be on track for a reasonably paced recovery, many economists expect pricing relative to last year to be weak.
A low COLA for the next year would result in little to no increase in current retiree social security checks and lessen the full retirement benefit (PIA) calculation for retirees in the future. The latter happens because their AIMEs would not be multiplied by rates as high as normal, resulting in a lower PIA. Those nearing or in retirement should factor this into their planning for 2021 to avoid an unexpected surprise.
