By Mary Johnson, editor
This may be difficult to believe, but consumer price index data suggests that the annual Social Security cost-of-living adjustment (COLA) for 2020 could be close to zero next year — a mere 0.5 percentage point. This comes even as the costs of goods and services used by retirees are shooting upward according to responses to TSCL’s 2019 Senior Survey.
My estimate is based on CPI data through March 2019 and projected through the third quarter of 2019, the quarter that the Social Security Administration will use to determine the COLA.
The COLA is calculated using data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Of the CPI groups that the Bureau of Labor Statistics (BLS) measures, the CPI-W covers only 28% of the total U.S. population, and specifically excludes households “with no one in the labor force, such as retirees.”
You read that right.
The index used to determine the COLA of retirees does not measure the spending patterns of retirees, but younger workers instead. Retirees, we all know, spend their money differently than younger people and must spend a far bigger share of their budgets on housing and medical costs — two categories of spending that often rise several times faster than overall inflation.
There are better and more fair choices for indexing the COLA. The BLS also measures the price change experience of All Urban Consumers (CPI-U) which covers about 88% of the U.S. population including retirees as well as younger people, and it even maintains a “senior-specific” experimental CPI, the Consumer Price Index for the Elderly (CPI-E), that our government has quietly tinkered with since 1983, but has never used to calculate the COLA.
The CPI-E tends to grow about 0.25 percentage point more quickly than the CPI-W on average, but there can be wide differences between the two. For example, if the CPI-E were used to calculate the COLA it would be 1.2% in 2020, vs. 0.5% based on CPI-W data through March 2019. We had similar situation in 2016 and 2017 when the COLA was zero and 0.3%, respectively. The CPI-E would have yielded 0.6% instead of zero, and 1.5% instead of 0.3%. Those are not big differences, but like interest, compound over time. For anyone depending on Social Security for half of their income or more, every dollar makes a difference — and adding up over time may be enough to buy an extra week’s worth of groceries.
This estimate is still just that — an estimate. The 2020 COLA is based on CPI data through September 2019 and won’t be announced until October. Inflation could start going up again, but with the first five months of data so low, we are likely to see another low COLA in 2020.
Is this fair? Should Congress change the indexing of the Social Security COLA to strengthen Social Security benefits? Click here to take our new 2019 Social Security survey.