Good News: A COLA Raise Likely After All

Sep 1, 2020 / Amanda Chase, Horsesmouth Assistant Editor

Inflation has been on a roller coaster in 2020. First, COVID-19 disruptions cratered prices for gasoline, travel, even car insurance. Summer rebounds in those commodities, as well as increases for in-demand items like used cars, meat and haircuts, have put the consumer price index back on a more normal trajectory, one that will likely mean an increase in the Cost of Living Adjustment (COLA) for 2021. The Kiplinger Letter is now forecasting a 1.2% increase in the 2021 COLA, which should be welcome news to retirees and others who receive Social Security benefits.

The Social Security Administration (SSA) is required by law to prevent inflation from eroding the buying power of the benefits paid out to nearly 69 million Americans. It uses a Social Security COLA formula based on the consumer price index to adjust payouts every January. Since prices typically rise, payouts typically rise also. If prices fall (as they did earlier this year), payouts would remain unchanged until prices catch back up again. But it matters when they fall.

The SSA calculates the percent change between average prices in the third quarter of the current year with the third quarter of the previous year; that’s why the final number comes out in October (this year it will be Oct. 13). And it’s likely that those figures (the third-quarter comparison) will show an increase. Note that the Social Security Administration ties its adjustment for Social Security benefits to the wage earners’ consumer price index, which is similar to, but not exactly the same as, the urban dwellers’ consumer price index (which drives inflation reporting).

Negative inflation has happened twice before—first in 2009, when a -2.1% rate meant no 2010 COLA, then knocked down the January 2011 COLA from 1.5% to zero, and and carried forward one last hit on the January 2012 COLA, which went from 4.2% to 3.6%. In the second case of negative inflation, there was no January 2016 COLA following a -0.4% inflation rate, and the January 2017 COLA fell from 0.7% to 0.3%.

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