Every month, more than 63 million people -- 70% of whom are retired workers -- receive benefits from the Social Security Administration. For a vast majority of these folks, the second week of October tends to yield one of the most important announcements of the year. That's when, following the release of September's inflation data from the Bureau of Labor Statistics, the Social Security Administration announces the cost-of-living adjustment (COLA) for the upcoming year.
Think of COLA as the "raise" that beneficiaries receive each year to account for the rising price of goods and services that they collectively face. Since more than three out of five retired workers count on their benefit for at least half of their income, this raise can be pretty important in determining whether they can make ends meet.
Continue Reading Below
How much of a raise can Social Security recipients expect in 2020?
So, how big a COLA should beneficiaries expect in 2020? While most analysts have yet to offer a guess for reasons I'll get to a bit later, one newly issued report offers its take on how big a raise could be headed the way of 63 million Americans next year.
In April, the annual Social Security Trustees report was released. While this report is primarily designed to provide lawmakers and the public with a short-term (10-year) and long-term (75-year) outlook on the program and its many variables, one aspect that tends to go largely unnoticed is that the Trustees also provide an under-the-radar glimpse at what they believe COLA will be in the very near term.
On page 115 of its more-than-260-page report, the Trustees provide a history of all previous COLAs, dating back to 1975, which is when COLA was tied annually to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Prior to 1975, benefit increases due to inflation were arbitrarily passed along by special votes from Congress. This page also lists a number of short-term projections in the program, through 2028.
Although the Trustees continue to foresee an average COLA of 2.6% in its short-term intermediate-cost model, the prognosticators also foresee a COLA of 1.8% in 2019 for the 2020 year. With the average retired worker bringing home $1,467.17 in March 2019, a 1.8% COLA would mean an increase of $26.41 a month, or almost $317 for the full year.
Before you get too excited, keep this in mind
Considering that the CPI-W has registered three years of deflation (i.e., falling prices) over the past decade -- a year-over-year decline in prices results in benefits remaining flat the following year -- a 1.8% increase in 2020 would actually be the fourth-largest raise in the last 11 years.
But before you get too excited, there's an important fact to keep in mind: namely, that we haven't even reached the months that actually matter for the COLA calculation (which is why most analysts haven't chimed in with a prediction yet).
You see, the average CPI-W reading from the third quarter (July through September) is all that matters for Social Security's COLA calculation, with the remaining nine months not playing any role. Sure, the months leading up to July can alert us to trends that could influence inflation during the third quarter, but CPI-W readings between October and June simply don't factor into the bottom-line COLA calculation. Since we haven't reached those months yet, and the Trustees report is often prepared well in advance of the third quarter, the accuracy of its prediction is questionable.
Regardless of the 2020 COLA, you're probably not going to be happy
It's also worth pointing out that while COLA is of vital importance to aged Americans, it's also a blatantly flawed calculation with no easy fix.
As the name implies, the CPI-W analyzes the spending habits of urban and clerical workers, nearly none of whom are receiving benefits from the Social Security program. Meanwhile, it ignores the spending habits of seniors, who make up 70% of the program's beneficiaries. As a result, important expenditures for seniors, such as medical care and housing, are often underweighted, while less-important costs, such as education, apparel, and transportation, which are important to urban and clerical workers, receive a higher weighting. In sum, the purchasing power of Social Security dollars continues to decline for most retired workers, pretty much regardless of the COLA they receive each year.
One possible solution that's been touted by Democrats is the idea of switching to the Consumer Price Index for the Elderly (CPI-E) instead of the CPI-W. As the name suggests, the CPI-E would only factor in the spending habits of households with persons aged 62 and up, thereby more accurately representing the medical and housing costs that aged Americans are contending with. Unfortunately, the CPI-E has no support from Republicans, whose votes would be needed to amend Social Security's inflationary tether in the Senate.
This means we're stuck with the CPI-W for the foreseeable future, which means a continued loss of purchasing power is very likely no matter what sort of raise is in the cards for 2020.
The $16,728 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.