We are living through a truly unprecedented moment in American and global history.
The coronavirus disease 2019 (COVID-19) has, as of March 27, infected more than 586,000 people worldwide, with the number of confirmed cases nearly doubling in a week, according to Johns Hopkins University. The confirmation rate is even higher within certain U.S. states, such as New York, where the number of COVID-19 cases is doubling approximately every three days. With little sign that the infection rate is slowing, there's no telling what sort of impact this disease could have on the physical and financial well-being of the American public.
But it's not just working Americans who could feel the sting of the mitigation measures put in place in the U.S. to curb the spread of the coronavirus. Social Security's more than 64 million beneficiaries, over 80% of which are senior citizens, are liable to feel the effects of COVID-19s impact.
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Over 64 million Social Security beneficiaries count on their annual "raise"
For these 64 million beneficiaries, there's arguably no event that's more important each year than the cost-of-living adjustment (COLA) announcement from the Social Security Administration (SSA) during the second week of October. Think of COLA as the "raise" that Social Security recipients receive from one year to the next that accounts for the inflation they've faced. I say "raise" because it's not a true raise, but rather a pay bump designed to keep beneficiaries on par with the rising cost for goods and services.
Since 1975, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) has been Social Security's inflationary tether. Although the Bureau of Labor Statistics reports CPI-W data every month, only readings from the third quarter (July through September) are used to determine the program's COLA for the upcoming year.
In simple terms, if the average CPI-W reading from the third quarter (Q3) increases in the current year from the average CPI-W reading during Q3 of the previous year, then beneficiaries will receive a raise. The amount of the payout increase is commensurate with the year-over-year percentage increase in the average CPI-W reading, rounded to the nearest tenth of a percent. In the 45 years that the CPI-W has been Social Security's inflationary measure, 42 have resulted in a positive COLA.
On the off chance that the price of goods and services collectively declines year-over-year, as happened in 2009, 2010, and 2015, no Social Security COLA is passed along. This means that benefits paid in 2010 and 2011 were the same as what recipients received in 2009, and the benefits paid in 2016 were equal to what was paid in 2015. Thankfully, benefits cannot decline during periods of deflation.
The unfortunate news for Social Security recipients is it appears likely that no COLA will passed along for 2021.
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Here's why retirees and the long-term disabled shouldn't count on a COLA in 2021
To preface my opinion here, we're still months out from seeing pertinent data that will actually matter toward Social Security's COLA calculation -- the July through September CPI-W readings -- so understand that the case I'm about to make is not set in stone. But there are very good reasons to believe that, for only the fourth time since the CPI-W became the program's measure of inflation, we're going to see prices decline year-over-year.
Without question, the biggest drag on the CPI-W is going to be the hefty decline we've seen in the price of oil. Energy is just one component of the CPI-W, but West Texas Intermediate (WTI) is currently on track for its worst monthly in history. Since the year began, WTI has lost close to two-thirds of its value. This is going to put serious pressure on gasoline and fuel oil prices, which in turn will act as a concrete block tied to the proverbial ankles of the CPI-W.
History would also suggest that no COLA is a real possibility. Following the steepest recession this country has seen since the Great Depression between 2007 and 2009, Social Security registered two consecutive years without a COLA. A recession is not a guarantee that the prices for goods and services will fall, but it's not uncommon to see deflation associated with a recession.
Furthermore, the Federal Reserve's actions to stabilize the U.S. economy and bolster inflation amid the coronavirus panic are going to take a while to work their way into the economy. Generally speaking, when the Fed makes an adjustment to its federal funds rate, it takes anywhere from three months to two years to have an impact. That means it's unlikely we'd see a significant bounce in the U.S. economy, or at least with regard to inflation, by the time July, August, and September roll around.
As of right now, all indications would appear to point toward no COLA in 2021.
Image source: Getty Images.
Yes, Social Security dollars will likely still lose purchasing power next year
To make matter worse, potentially receiving no COLA isn't the only issue retired workers may contend with in 2021.
Over the past decade, beneficiaries have seen the purchasing power of their Social Security dollars eroded by 18%. Go back to the year 2000, and this loss of purchasing power is an even more frightening 33%, according to The Senior Citizens League.
The issue is that the CPI-W simply doesn't do a good job of accounting for the expenses that actually matter to seniors. That's because, as its official name describes, the CPI-W tracks the spending habits of urban and clerical workers, neither of which are likely to be receiving a Social Security benefit. This means important expenditures to retired workers, such as medical care and housing costs, aren't being weighted highly enough by the CPI-W, while less important costs, like education and apparel, have added weighting.
In short, the coronavirus is creating a no-win situation for seniors receiving Social Security.
"Opinion" - Google News
April 05, 2020 at 05:07PM
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Opinion: There'll Be No Social Security COLA in 2021 - The Motley Fool
"Opinion" - Google News
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