Social Security Announces 1.3% Cost of Living Adjustment (COLA) for 2021
In October, the Social Security Administration announced a modest 1.3% Cost of Benefit Living Adjustment (COLA) for 2021. How will this small increase affect retirees?
The Social Security 2018 increase is big, but definitely NOT that big.
The average Social Security recipients will receive a mere $20 monthly bump in 2021, which will buy you an extra 1.2 gallons of milk per month or less than one extra tank of gas.
Is the Social Security 2021 COLA Increase Enough?
You are probably saying: “What? Ugh! Haven’t prices gone up more than that? Much more?”
Gary Koenig, vice president of financial security at AARP told the Washington Post in 2018, “If you polled seniors, 10 out of 10 would say the COLA is not keeping up with their costs.”
And, not keeping up with monthly costs has short term as well as long term consequences. Mary Johnson of the Senior Citizens League worries that these small increases are problematic: “It’s squeezing [seniors]. It’s causing them to dip into savings more quickly. The lifetime income that they were counting on just isn’t there.”
Year after year of small increases has a cumulative effect. In fact, each inadequate increase impacts a retiree’s income for the rest of their lives.
You may wonder how it came to this. Why is it that seniors see less and less purchasing power? What is the Social Security Cost of Living Adjustment (COLA), and how is it calculated?
How Social Security’s Cost of Living Adjustment (COLA) Is Calculated
The first Social Security COLA increase was in 1950. It took an act of Congress, and the benefit increased by 77%. Two more acts of Congress in the 1950s brought the total increase to 125% over its original level by the end of the decade. From 1950 to 1975 the COLA was increased by single acts of Congress nine times.
In 1973 legislation was passed that dictated that Social Security benefits would keep place with inflation, and the first yearly, automatic COLA increase came in 1975. The Social Security Act specifies that COLAs are determined based on increases (decreases are not used) in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The Social Security Administration uses the average CPI-W data from July, August and September of the previous year and compares it to the same time period of the current year. The percent change in the two numbers is the COLA increase.
Does the Way Social Security’s Cost of Living Adjustment (COLA) Penalize Retirees?
As it says in the name, the CPI-W measures the increases in costs of the types of things that urban workers typically buy and in what proportion. The problem with using this measure for Social Security is that retired seniors spend money quite differently than most workers. Most notably, seniors spend quite a bit more on healthcare than the general population.
To make matters worse, healthcare costs have been rising much faster than most other goods and services. Different measures show that healthcare costs have risen 3% to 12% each year in the last decade. And seniors spend a greater proportion of their income on healthcare than an average worker.
According to the Senior Citizens League, “The suppressed growth in Social Security benefits not only creates ongoing benefit adequacy issues for retirees, but also Medicare budget problems when the COLA is not sufficient to cover rising Part B premiums for large numbers of beneficiaries.” Though there are some statutory protections for Part B premium increases, about 30% of beneficiaries are not protected and could see “substantial spikes” in their Part B premiums.
Alternatives to the CPI-W method of calculating the Social Security COLA have been proposed, including something called the R-CPI-E for “Retirement Price Index for Elderly Americans.” This method of calculating inflation specifically for people over the age of 62 was mandated by the Older Americans Act of 1987, but it has never been used to update the Social Security COLA.
How to Make Sure You Have Sufficient Retirement Income
Social Security is only designed to replace part of your retirement income. It is almost (but not quite) impossible to live on Social Security alone.
Here are 4 things you should do to make sure you have sufficient retirement income, regardless of Social Security 2018 increases:
1. Calculate All Sources of Retirement Income
You will want to think about how you will be withdrawing and/or earning from savings and whether or not you have a pension or a retirement job.
2. Estimate Your Retirement Expenses:
How will your spending change over the course of retirement?
3. Assess Inflation
Ronald Reagan said, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” And, it is true. Inflation will make whatever money you have be worth less. That is one of the reasons why predicting and calculating inflation correctly is so important for your future financial security.
4. Protect Yourself from Other Risks
Inflation is not the only unknown that could devastate your retirement finances. You also need to plan for a long life, a healthcare emergency, natural disasters and more.
Build Projections of Social Security Income Into Your Retirement Plan
Sound complicated? It does not need to be.
The NewRetirement retirement planning calculator is an easy to use but super detailed tool that will tell you if you have sufficient retirement income. You can set different levels of spending and income for different phases of retirement.
You can even set your own estimated inflation rates — one for general spending, another for housing and medical costs can be specified separately. Try different rates for each category and see how much it impacts your retirement financial health.