The crystal balls are coming out early this year as financial prognosticators make projections about Social Security payouts in 2021. Because of the COVID-19 pandemic and subsequent U.S. lockdown of both people and the economy, there is a growing belief that there will be little or no Social Security cost-of-living adjustment (COLA) next year based on economic facts and the expectation of almost non-existent inflation.
Consumer prices fell 0.8% in April 2020. That’s the largest drop since the Great Recession in 2008. Some food prices, specifically meat and eggs, rose substantially. However, prices for gas, clothing, and travel-related items were hit hard. Because of those economic factors, Kiplinger expects the U.S. inflation rate to end the year at approximately 0.3%, compared to 2.3% last year.
The Social Security Administration adjusts the annual COLA by comparing the Wage Earner’s Consumer Price Index for the third quarter of the current year and the third quarter of the previous year. The comparison this year is expected to be flat, and that’s why the bet is no COLA increase in 2021.
But what happens if the inflation rate is negative—if businesses, manufacturers, etc., cut prices in an attempt to get business back—and the economy experiences deflation? For Social Security recipients, there is no change to their monthly benefit. Federal law says Social Security benefits cannot be reduced. But if there is deflation between the third quarters of 2019 and 2020, it could affect Social Security payments in 2022.
For example, if this year’s inflation rate turns out to be -0.3%, the negative number will be subtracted from the next positive COLA. In this hypothetical calculation, if the next inflation rate is 1.5% it would look like this: 1.5% – 0.3% = 1.2%. Social Security recipients don’t get hit when inflation is negative but they pay for it when inflation goes back up.
Negative inflation has happened twice before—in 2009, when the rate was -2.1%. Social Security retirees didn’t get a COLA in 2010. The second time in 2016, after a -0.4% inflation rate.
The Federal Government will make the official COLA announcement in October. A lot can happen by then. In the meantime, the batteries powering prognosticator crystal balls are getting weaker. It seems batteries are not an essential item that qualifies for next day delivery.