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On Social Security? Expect a Smaller Raise in 2020

Dan Caplinger, The Motley Fool

Living on a fixed income is hard, and a large number of retirees in the U.S. rely on Social Security to provide all or almost all of their regular income. One particularly beneficial way that Social Security helps retirees is that the monthly checks that recipients get are adjusted higher each year to reflect the impact of inflation. Although some argue that those boosts don't actually reflect the specific costs that retirees face , they nevertheless are invaluable for those trying to make ends meet.

The cost-of-living adjustment (COLA) that took effect at the beginning of 2019 pushed benefits higher by 2.8%, which was the largest increase since 2012. However, although it's too early to be sure what the increase in benefits in 2020 will be, it looks highly unlikely that any COLA will match what Social Security participants got earlier this year. Below, we'll take a closer look at exactly how big a benefit increase Social Security recipients might get.

Social Security card folded into a pile of coins.

Image source: Getty Images.

How Social Security gives out more money most years

The law governing Social Security requires benefits to adjust for changing prices on an annual basis. By focusing on changes in one of the measures of the consumer price index, specifically the CPI-W, the Social Security Administration tries to account for the impact that inflation has on pricing power for those receiving benefits.

The numbers that go into producing the annual cost-of-living adjustment come from the three summer months: July, August, and September. As inflation data comes in from the Bureau of Labor Statistics, Social Security recipients can see how those numbers will eventually produce the three-month average for 2019. The SSA takes that average and then compares it to the corresponding average over the same period in 2018. The percentage difference defines the amount of the cost-of-living adjustment.

Where COLAs look to be headed

The three-month average for 2018 came out to 246.352, with the trend during the three-month period moving slightly higher. The corresponding average for 2019 won't be available until mid-October, when the final piece of the puzzle comes out in the form of the September CPI report.

However, the Bureau of Labor Statistics just released its May inflation numbers, and we can use that to determine at least a reasonable starting point. The CPI-W hit 249.871 in May. That's up 1.7% from where it was 12 months ago, and it's 1.4% higher than the three-month average for the summer months in 2018.

Where's inflation headed?

With several months still left before the final COLA will be determined, it's reasonable to think that the rate could climb from that current 1.4% amount. However, there are a couple of things to consider:

  • Historically, the level of inflation has tended to go through fits and spurts of large gains followed by quieter periods of flat or even falling price levels. With the CPI-W having seen big gains between January and May, we could be ready to see more modest changes ahead.
  • More specifically, rising gasoline prices were a major contributor to the spike in the CPI-W in early 2019. More recently, though, gasoline prices have topped out and started to decline. If that continues into the summer months, then it could cause the inflation measure to stop rising, and even outright declines from May levels are possible.

Unfortunately for retirees on fixed incomes, modest levels of COLAs have become the norm rather than the exception to the rule. Over the past decade, Social Security recipients have had to endure three years of getting no COLA at all, and there were several increases in the range of 1.5% to 2%. Such a result seems likely for 2020 if inflation remains positive but muted over the next several months.

Start preparing for 2020

There's still time for the current situation to change, and when it comes to inflation data, anything can happen . However, without a big departure from what we've seen most frequently in the past, Social Security COLAs look poised to come down dramatically in 2020. Those on fixed incomes should do what they can to prepare for that eventuality now.

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