Are you happy or sad that your monthly Social Security check next year will be approximately 1.2% higher than it is this year?
Your answer no doubt depends on whether you look at the glass as half full or half empty. Had the Social Security Administration set next year’s COLA in May, for example, the COLA would have been zero. That’s because the Consumer Price Index’s was lower at that point than where it had stood a yearly previously.
So you might feel grateful that you’re going to get a 1.2% COLA. Nevertheless, since the Consumer Price Index is undoubtedly underestimating inflation during this pandemic, retirees next year are still likely to be less well off in inflation-adjusted terms.
Welcome to the surprisingly complicated world of how to adjust Social Security benefits for inflation. In this column I review the various ways in which retiree inflation can be measured and how the Social Security Administration (SSA) determines its yearly COLA.
et me start by giving credit to the author of the 1.2% estimate of next year’s Social Security. It comes from David Muhlbaum, who is senior online editor at Kiplinger.com. He was unable to do better than providing an estimate because the SSA will set 2021’s COLA based on the 12-month inflation rate through the third quarter of this year. That means the precise COLA won’t be known until the September inflation numbers are released, which is slated to be on Oct. 13.
Another relevant detail about the SSA’s COLA-setting process is that it doesn’t rely on the CPI that we see reported each month in the financial press. That Index is technically referred to as the “Consumer Price Index for All Urban Consumers” (CPI-U). The SSA instead relies on a different index, known as the “Consumer Price Index for All Urban Wage Earners and Clerical Workers” (CPI-W)…Read more>>