Next year’s cost-of-living adjustment (COLA) for Social Security—a precursor of what can be expected for retirement plan contribution and benefit limits—is likely to remain nearly flat.
According to estimates by The Senior Citizens League (TSCL), Social Security recipients will probably get a 1.3% cost of living adjustment (COLA) in 2021, making it one of the lowest ever paid.
TSCL says that, based on historic trends, there’s only a 5% chance that the COLA could rise above 1.3% and there is a 15% chance that it could be lower. While the inflation rate during May through August suggests the COLA could go up to 1.4%, the more recent three-month rate from June through August and a new downward trend in gasoline prices indicate it will probably be 1.3%, explains Mary Johnson, Social Security policy analyst for TSCL.
“Our forecast is based on CPI data through August, and there is still one more month of consumer price data to come in before we get the official announcement in October,” says Johnson.
Should the forecast prove to be correct, this would mark the 5th time since 2010 that there will be an extremely low—or even no—annual inflation adjustment, the organization notes. The COLA was zero in 2010, 2011 and 2016, and just 0.3% in 2017. Since 2010, annual COLAs have averaged just 1.4%, TSCL further notes.
As to why the COLAs are so low, TSCL suggests that one major reason has to do with whose “market basket” the government is using to measure inflation and to calculate the annual adjustment. Under current law, the Social Security COLA is determined by the percentage of change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The organization observes that that market basket belongs to younger working adults under the age of 62 and doesn’t include the households of people who are retired. As such, the CPI-W gives greater weight to consumer items purchased more frequently by younger people like gasoline and electronics, while giving less importance to housing and medical expenses.
The Social Security Administration is expected to announce the annual COLA adjustment on Oct. 13, 2020. Of course, the IRS has not yet announced the official 2021 limits for retirement and other benefit-related purposes, but it should be doing so in the near future.
