You may not realize it, but this is the most important time of the year for nearly 65 million Americans. This is because in October the Social Security Administration announces all its updates for the coming year.
After the curtain closes in 2020, we will see more than half a dozen changes in social security, including an increase to the full retirement age for people born in 1959. But the biggest change of all, and this more than 46 millions of retired workers appreciate the most is the adjustment of the cost of living.
Beneficiaries of social security have a raise
In its simplest form, COLA is an “increase” that is passed on to all social security beneficiaries to take account of the inflation they have faced in the last year. I say quote promotion because it is not a promotion in the true sense of the word. COLA is not intended to allow social security beneficiaries to progress. Rather, it is there to allow recipients’ social security incomes to keep pace with rising prices for goods and services over time.
October is the most important month, as the COLA calculation of social security takes into account only the readings from the Consumer Price Index for Urban Workers (CPI-W) in the third quarter (July to September). As the Bureau of Labor Statistics reports inflation data in September in the second week of October, this becomes the last piece of the puzzle needed to calculate the COLA of social security.
The 2019 coronavirus disease pandemic (COVID-19) led to one of the wildest recessions in history, and some feared that possible deflation could prevent the SSA from issuing COLA. Social security beneficiaries can breathe a little easier with the good news that they will indeed get a raise in 2021. The SSA announcement of 13 October called for a 1.3% COLA in January.
1.3% COLA is simply not enough
But there is a drawback.
Payments increase by 1.3% for the second lowest positive COLA of all time, lagging only by a 0.3% increase in 2017.
You may be thinking, “Hey, the 1.3% payout increase isn’t much, but at least it’s suggesting that headline inflation is easing.” Unfortunately, this does not apply to senior citizens, whom the social security program is designed to protect.
The unadjusted inflation rate over the next 12 months for two of the most important expenditures for the elderly – shelter and medical care – is ahead by 1.3%. This suggests an impending loss of purchasing power for older people in 2021. This will be based on the projected loss of purchasing power of 30% for social security income since 2000, according to an analysis by The Senior Citizens League.
1.3% COLA is simply not enough to offset the incomes of retired workers with the inflation they are actually facing.
Two MPs have just introduced a bill for more than twice COLA for next year
Realizing the plight of the elderly after the COVID-19 recession, two MPs – the representative Peter DeFazio, D-Ore and John Larson, D-Conn. – introduced the COLA Emergency Social Security Act for 2021 last week.
The goal of the bill is simple: to increase the COLA of social security to 3% in 2021. This would double more than the announced 1.3% COLA and would easily outpace inflation in the shelter (the largest single cost for adults).
Both DeFazio and Larson also called for switching the program’s inflation link from CPI-W to the consumer price index for the elderly (CPI-E), though not in the bill they introduced last week. The CPI-W is inherently erroneous as an inflationary social security link, as it tracks the spending habits of city officials and bureaucrats, not the elderly, who make up the lion’s share of beneficiaries. As a result, important costs for retired workers are underestimated in the COLA calculation, while less important costs (eg clothing and education) are given greater weight.
The CPI-E specifically monitors the spending habits of households over the age of 62. Using CPI-E instead of CPI-W should lead to more accurate inflation measurements and more stable COLAs over time.
Will it pass? Probably not
The question of $ 64,000 is whether the COLA Emergency Social Security Act of 2021 will pass Congress and be enacted. The answer? Probably not.
As I write this just days after the bill was announced, there is a decent chance it will find its way to the floor in the House of Representatives, led by the Democrats, where it was tabled. But he is unlikely to find his way to the Senate floor to vote with Majority Sen. Mitch McConnell, who is interfering. That makes this account dead on arrival in the Senate.
The substitute here is that we have 10 days left from election day, and the increase in COLA for Social Security for the Elderly can be seen as a feather in President Trump’s hat. That could put enough pressure on McConnell and other Senate Republicans to act. Republican lawmakers clearly do not prefer to use the CPI-E as an inflationary link to the program, but a bill focused on the one-off 3% COLA is not completely ruled out.
At the moment, I am leaning towards this bill, which does not become law – but anything is possible.