Seniors who rely on Social Security for most of their retirement income have the ongoing financial worries and limitations. To be honest, those benefits were never designed to sustain pensions by themselves. But many seniors retire with insufficient savings, and instead rely heavily on Social Security to make ends meet.
It is for this reason that social security increases, known as living expenses adjustment costs, such as COLAs, are crucial. COLAs are calculated year-on-year based on third-quarter changes in the Consumer Price Index for Former Workers and Clergy Workers (CPI-W). If the CPI-W indicates that the cost of common goods and services has increased, seniors are eligible for an increase. If the CPI-W deviates or stays flat, Social Security benefits will not go up. (Fortunately, they do not go down either.)
For the 11-year period ending in 2019, the benefits of Social Security increased 1.4%, on average. But in that time frame, there were three separate years when seniors did not receive COLA at all. And now the fear is that Social Security in 2021 will not go up at all, or that the incoming increase for seniors will be at best negative.
Image Source: Getty Images.
Why seniors should not expect much from next year’s COLA
The COVID-19 crisis has changed the way consumers spend, and although certain expenditures – namely groceries – have increased, the cost of gas and other common goods and services has fallen. Meanwhile, the year-over-year increase in the CPI-W just June was 0.15%. But it is data from the third quarter of the index that really makes a difference, as they are used to determine what COLAs amount to.
Assuming the index does not fluctuate as much in the third quarter of 2020, seniors can look at a meager 0.5% COLA at best. If we apply that to the average monthly benefit of $ 1,503, that’s an extra $ 7.50 per month – hardly much to write about at home. And at this point, that really is the best case. It is still possible that seniors are not in line for an increase at all for 2021.
As such, those who rely heavily on Social Security should be prepared for the fact that their income will not change substantially in the coming year. Many seniors have already cut back on spending over the course of the pandemic, not out of choice, but out of necessity. But as vegetable prices continue to rise and remain so, an absent or moderate COLA could put many older Americans in a less financial position next year.
Annual COLAs are announced in October each year, so Social Security beneficiaries will not know for a while what their 2021 income will look like. But those who can boost their income need to be safe once and for all.
Currently, the COVID-19 pandemic is forcing many seniors to stay home instead of working the part-time jobs they would otherwise hold to supplement their Social Security income. Many seniors do not have the option to work remotely, but those who do should take advantage of next year’s potential to avoid financial problems.
