Will 2021's Social Security COLA Be Similar to This Year's Disappointing Raise?
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Will 2021's Social Security COLA Be Similar to This Year's Disappointing Raise?

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Will 2021's Social Security COLA Be Similar to This Year's Disappointing Raise?

Each year, millions of Social Security recipients eagerly await news of a cost-of-living adjustment, or COLA. Introduced back in the 1970s, the purpose of automatic COLAs is to help seniors on Social Security maintain their buying power in the face of inflation.

But don't misunderstand the "automatic" component involved. Some years, seniors don't actually get a COLA, since raises are based on fluctuations in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

In a nutshell, when the cost of common goods and services increases, Social Security benefits typically go up. When that cost remains stagnant, benefits can stay the same or move upward only slightly (thankfully, they can't go down from one year to the next).

IMAGE SOURCE: GETTY IMAGES.

Seniors on Social Security saw a 1.6% COLA going into 2020, and many weren't happy about it. That's largely because that raise was only slightly more than half of 2019's 2.8% COLA.

The fact that monthly Medicare Part B premiums jumped from $135.50 in 2019 to $144.60 in 2020 only added insult to injury. Most seniors stood to receive a $24 raise thanks to 2020's meager COLA. With Medicare's premium hikes, those paying for Part B lost over one-third of that measly $24.

In light of 2020's disappointing COLA, many seniors are hoping for a more generous boost in benefits for 2021. But, unfortunately, early estimates from the nonpartisan Senior Citizens League point to a 1.5% COLA for the upcoming year. That's a notch lower than what seniors received in 2020, and it's certainly not the news Social Security beneficiaries want to hear.

Don't get worked up over next year's COLA just yet

Of course, the key thing to keep in mind is that today's COLA estimates are just that -- estimates. It's way too early in the year to get an accurate assessment of what seniors' next COLA will look like, and it's important to note that in early 2019, the Senior Citizens League estimated no COLA at all for 2020, when, in fact, it came in at 1.6%.

The Social Security Administration won't be announcing next year's COLA until October, and between now and then, a host of new projections might emerge. Still, seniors who are dependent on Social Security shouldn't bank too heavily on a raise for 2021 -- not only because that 1.5% estimate could change for the worse, but also because COLAs themselves generally aren't life-changing.

The average senior today collects $1,503 a month in benefits, so a 1.5% COLA translates into an extra $22.55, or $270.60 per year. But if Medicare premiums go up a lot, much of that raise will be wiped out. Thus, those who are heavily reliant on Social Security and already struggling financially should take steps to improve their financial picture by making strategic choices -- cutting back on expenses, downsizing their homes, or relocating to less expensive corners of the country.

Engaging in part-time work is another key step for cash-strapped seniors. Generating job-related earnings is a far more effective means of boosting retirement income than sitting back and awaiting a COLA -- a COLA that may, once again, prove disappointing.

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The Motley Fool has a disclosure policy.

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