Experts are looking for about a 1 percent increase starting in January 2021, and possibly less. “Obviously, the amount of the COLA hinges on the economy, which has picked up in the past month,” says David Certner, AARP's director of legislative policy for government affairs. “We have a shot at somewhere between 0.5 percent and even as high as 1 percent.”
Other experts’ projections are in the same ballpark as Certner's. Mary Johnson, Social Security and Medicare policy analyst for the Senior Citizens League, estimates a 1.1 percent COLA going into effect in 2021. Jim Blankenship, a financial planner and author of A Social Security Owner's Manual, has a more conservative estimate: 0.44 percent.
"It's small, as COLAs go,” Certner says. Based on the average Social Security retirement benefit of $1,514.13 a month, a 0.5 percent increase would be $7.57 a month; a 1 percent increase, $15.14.
Why is the COLA forecast for 2021 so low?
Social Security COLAs have been sparse the past 10 years. The average COLA over the decade has been a 1.52 percent increase, with the largest being the 2.8 percent rise that went into effect in January 2019. There were no COLA increases starting in January 2011 or January 2016.
One reason a small COLA is expected for 2021 is that inflation has been low. The COLA is determined by the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, from the third quarter of 2019 to the third quarter of 2020. The COLA calculation looks at the average CPI-W index numbers for July, August and September of 2019 and compares them with the same third-quarter numbers for 2020. The percentage change between the two quarterly averages is the COLA for the following year. If there's no change, or if there's a decline in the CPI-W, there's no increase in Social Security benefits.
The CPI-W has increased 1 percent for the 12 months ended July 2020, the latest data available from the U.S. Bureau of Labor Statistics (BLS). Once inflation data is collected for August and September, the third-quarter average will determine the amount, if any, of the 2021 COLA. The Social Security Administration (SSA) typically announces the amount of the COLA for the upcoming year in October.
The impact of the coronavirus outbreak, which has depressed economic activity, has made inflation forecasting extremely difficult. “Nothing is the way you'd expect it to be this year,” Johnson says. For example, some grocery items, such as meat and chicken, have soared in price. The price of a gallon of regular gasoline, however, has fallen from $2.608 twelve months ago to $2.188 today, according to AAA.
Social Security and Medicare Part B premiums
If the increase in Social Security is small enough, some retirees may get a small break on their Medicare Part B premiums. The law says that if the COLA for Social Security is less than the increase in Medicare Part B premiums, then the premiums would be reduced to prevent a decrease in Social Security retirement benefits. This provision could prevent as many as 43 million beneficiaries, or 70 percent, from having increases in Medicare Part B premiums larger than their Social Security COLA. “Those who have monthly benefits of about $900 or lower would be protected,” says Johnson of the Senior Citizens League.
Even under the so-called “hold harmless” provision of Social Security law, if the COLA is small enough, beneficiaries would effectively get no annual increase. And under the law's provision only Medicare Part B premiums are covered. Premiums for other Medicare coverage options, such as Part D, which pays for drugs, would not be affected, nor would supplementary Medicare policy premiums.
The hold harmless provision only applies to current beneficiaries who have the standard Part B premium deducted from their Social Security benefits. Those who pay their Part B premiums directly to Medicare, as well as high-income beneficiaries who pay more than the standard premium for Part B, are not covered by the provision.