By Maurie Backman, The Motley Fool
Seniors who rely on Social Security for the bulk of their retirement income tend to have ongoing financial concerns and constraints. To be fair, those benefits were never designed to sustain retirees by themselves. But many seniors enter retirement with inadequate savings, and instead depend heavily on Social Security to make ends meet.
It's for this reason that Social Security raises, known as cost-of-living adjustments,
or COLAs, are crucial. COLAs are calculated from year to year based on
third-quarter changes in the Consumer Price Index for Urban Wage Earners
and Clerical Workers (CPI-W). When the CPI-W indicates that the cost of
common goods and services has gone up, seniors become eligible for a
raise. When the CPI-W declines or stays flat, Social Security benefits
don't go up. (Thankfully, they also don't go down.)
For the
11-year period ending 2019, Social Security benefits increased 1.4%, on
average. But during that time frame, there were three separate years
when seniors got no COLA at all. And now, the fear is that Social
Security either won't go up at all in 2021 or that the incoming raise
for seniors will be negligible, at best.
Why seniors shouldn't expect much out of next year's COLA
The
COVID-19 crisis has changed the way consumers spend, and while certain
expenses -- namely, groceries -- have increased, the cost of gas and
other common goods and services has gone down. Meanwhile, the
year-over-year increase in the CPI-W was just 0.15% as of June. But it's
the index's third-quarter data that really makes a difference, since
it's used to determine what COLAs amount to.
Assuming the index doesn't budge all that much in 2020's third
quarter, seniors may be looking at a meager 0.5% COLA, at best. When we
apply that to the average monthly benefit of $1,503, that's an extra
$7.50 a month -- hardly much to write home about. And at this point,
that's really the best-case scenario. It's still quite possible that
seniors won't be in line for a raise at all for 2021.
As
such, those who rely heavily on Social Security must prepare for the
fact that their income won't change substantially in the coming year.
Many seniors have already cut back on spending in the course of the
pandemic, not by choice but out of necessity. But if grocery prices
continue to rise and stay that way, an absent or measly COLA could put a
lot of older Americans in a worse financial position next year.
Annual
COLAs are announced each year in October, so Social Security
beneficiaries won't know for a while what their 2021 income will look
like. But those in a position to boost their income should aim to do so
once it becomes safe.
Right now, the COVID-19 pandemic is forcing
a lot of seniors to stay home rather than work the part-time jobs
they'd otherwise hold down to supplement their Social Security income.
Many seniors don't have the option to work remotely, but those who do
should take advantage of it to potentially avoid financial struggles
next year.
See more at The Motley Fool
