retirement

No 2021 Social Security COLA Increase Likely

Social Security benefits get a yearly boost to keep up with the cost of living — except when they don’t.

October 14, 2020

Update: 1.3% COLA Announced for 2021

The Social Security Administration (SSA) is required by law to prevent inflation from eroding the buying power of the benefits paid out to nearly 69 million Americans. It uses a Social Security COLA formula based on the consumer price index to adjust payouts every January. Since prices typically rise, payouts typically rise also. If prices fall, payouts stay unchanged until prices catch back up again. A flat COLA is what Kiplinger is currently forecasting for 2021, given very weak inflation this year so far.

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How Is the 2021 Social Security COLA Calculated?

The Social Security Administration ties its adjustment for Social Security benefits to the wage earners’ consumer price index, which is similar to, but not exactly the same as, the urban dwellers’ consumer price index (which drives inflation reporting). Also, the SSA also calculates the percent change between average prices in the third quarter of the current year with the third quarter of the previous year; that’s why the final number comes out in October. And it’s likely that those figures (the third-quarter comparison) will be flat — thus, no Social Security COLA for 2021.

But it could turn out to be worse: The rate could be negative — that’s right, deflation, falling prices. Fortunately for Social Security beneficiaries in 2021, the law says that Social Security COLAs cannot be negative; your 2021 benefits won’t shrink.

But, if there is deflation between the 2019 and 2020 quarters, the effect could be lasting and affect any 2022 COLA. Say this year's inflation rate turns out to be -0.3%. In that case, the 2021 COLA would be zero. But the negative value will get deducted from the next positive COLA. In that case, if 2022’s COLA calculation calls for a 1.5% increase, recipients would only see 1.2% (1.5% - 0.3% = 1.2%).

Negative inflation has happened twice before — first in 2009, when a -2.1% rate meant no 2010 COLA, then knocked down the January 2011 COLA from 1.5% to zero, and and carried forward one last hit on the January 2012 COLA, which went from 4.2% to 3.6%. In the second case of negative inflation, there was no January 2016 COLA following a -0.4% inflation rate, and the January 2017 COLA fell from 0.7% to 0.3%.