COLA Conundrum

It’s that time of year again.  The days are getting shorter, the nights are getting colder, and all I want to do is find a nice cave to hibernate in for the winter. Despite all the insanity we are quickly approaching the end of 2020 and the final quarter of the year brings many housekeeping activities.

Earlier this week the Social Security Administration (SSA) announced the 2021 cost of living adjustment (COLA) will be a paltry 1.3%. For the average beneficiary that equates to a ~$20 a month raise, barely enough to cover the increase in Medicare Part B premiums.  

Unfortunately, this is far from a new occurrence.  The average COLA from 1999-2009 was 3%, but that drops to under 1.4% for the last decade. 2020’s 1.3% increase was one of smallest increases in the program’s history, second only to 2017’s 0.3%. The real issue resides in how the COLAs are calculated.  The SSA looks at the “Consumer Price Index for Urban Wage Earners and Clerical Workers”, or CPI-W, which focuses on what workers age 62 and under pay.  CPI-W really falls short in being able to accurately portray the inflation seniors have seen over the years.  You can read more about this imbalance in our most recent Facebook post:

Hopefully though, this will all be rectified soon as some congressional lawmakers are proposing changes to the system.  The Emergency Social Security COLA for 2021 Act is set to be introduced to congress today and aims to raise the 2021 COLA from 1.3% to 3% citing that senior’s purchasing power has been eroded by about 30% since 2000.  In addition, these lawmakers are also looking to switch from the inaccurate CPI-W to the “Consumer Price Index for the Elderly”, or CPI-E to better reflect the conditions seniors face today.

So where does that leave us?  Well, its harder than ever to be a retiree. In the last 20 years Social Security has been eroded by inflation, leaving beneficiaries with 2/3 the purchasing power.  Couple that with historically low interest rates and the extinction of pensions and you have a tough situation for people looking for steady income.   Knowing where you stand, having a plan and contingencies in place is the best way make sure you have a successful, happy retirement.