Across the country, coronavirus cases are on the rise. In fact, some public health experts warn that we may already be seeing a second wave, while others believe that the first wave has never ended.
Obviously, this is terrible news because it means that hundreds of thousands more people could get sick and even die. This is also very bad news for the economy, as the states that began to reopen the reverse course and the companies closed again. But as negative as the effects of a second wave could be to everyone, Social Security beneficiaries especially risk facing long-term financial consequences if a second wave occurs now.
That’s because this quarter is key and determines whether they will see an increase in their benefits next year.
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A second wave means that consumer spending will drop at a critical time
To understand why Social Security beneficiaries will face huge financial consequences if there is a second wave of COVID-19 now or in the near future, you need to know how cost-of-living adjustments (COLAs) work.
Social Security beneficiaries get a cost-of-living adjustment once a year that increases their benefits to help them keep up with inflation. But they only get it if prices are going up. And to determine if that’s happening, the Social Security Administration (SSA) looks at the Consumer Price Index for Urban Salaried Workers and Administrative Workers (CPI-W).
Specifically, SSA compares the IPC-W during the third quarter of the current year with the IPC-W during the third quarter of the previous year. That means they will see how prices compare during July, August, and September this year to last year’s prices.
Unfortunately, given that the country is already in a recession, and economic problems are likely to worsen if there is a second wave of coronaviruses, there is a very good chance that prices will fall compared to last year. After all, there will likely be very low consumer demand for many of the key elements accounted for in the CPI-W if people are locked up in their homes, worried about contracting a virus, and worried about keeping their jobs if they aren’t out of work already.
If there is no increase in the CPI-W this quarter, there will be no cost of living adjustment. And that is a big problem for many older people. With the average Social Security benefit coming in at just $ 1,503 per month, the benefits no longer provide enough to live on. And the CPI-W is not really a very accurate measure of inflation on what older people spend the most, so Social Security benefits have already lost substantial purchasing power.
If there is no COLA this year, older adults may see their purchasing power drop further. And because all future increases are based on a percentage increase in current benefits, their effects will be felt in the long term.
Social Security retirees must be prepared not to receive COLA next year
Since there is a very good chance that older people won’t get a raise next year, retirees on a fixed income should start planning now for that possibility.
This is likely to mean cutting your budget now, so you’re ready if your purchasing power drops next year, and so you can save some extra cash if you’re in deficit. Also, make sure you know how much you can safely withdraw from your investment accounts, as you don’t want to take out too much money to offset Social Security benefits that are too small, only to find that your accounts fall short while you’re still trusting in them.
Future retirees should also be aware that COVID-19 could have a long-term adverse impact on Social Security for several reasons, and should make plans to save a little more for retirement because there is a good chance that these benefits will be smaller than expected by the time they leave the world of work.
