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When you retire, and Social Security is a significant part of your retirement income, the cost of living adjustments (COLA) helps offset your loss of purchasing power due to inflation. The news may not be great for recipients of Social Security retirement income in 2021. The cost of living adjustment for Social Security will likely zero or close to zero. For the nearly 69 million people receiving Social Security benefits, this may mean tightening budgets. The Social Security COLA was just 1.6% in 2020.
In 2020, the average Social Security benefit was just $1,503 per month. For those of you who are higher on the income scale, the maximum Social Security benefit was $3,011, per month, at full retirement age in 2020. The 2021 Social Security COLA will not be announced until October. With the Coronavirus strangling the economy, it is expected that the COLA will be small or even zero for 2021.
How is the Social Security COLA Determined?
Each year, the Social Security Administration (SSA) bases the cost of living adjustment (COLA) increase on the Department of Labor’s consumer price index (CPI) for urban wage earners and clerical workers. The CPI is meant to be used as a measure of inflation.
Retirees will continue to feel pressure on their wallets, even with this cost of living increase. Social Security benefits typically do not keep up with the everyday expenses people face as they age. We are talking about expenses like housing, food, transportation, and of course, health care and the astronomical amount of money people pay for prescription drugs.
Over the past decade, Social Security Cost of Living Adjustment has averaged just 1.4%. There have also been several years when the COLA was zero. The average Social Security COLA was around 3% between 2000 and 2009. We saw a zero cost-of-living adjustment for Social Security in 2010, 2011, and 2016.
For those that think the Social Security COLAs don’t matter much, SS benefits have lost more than 30% of their purchasing power since 2000. Many Americans will be retired for 20 or 30 years, some even longer than that. My oldest client is over 100 years old and still kicking. She retired before I was born.
More Social Security Taxes Coming in 2021?
For those of you still earning an income, we saw a 3.6% increase in the income subject to Social Security taxes in 2020. This year, your first $137,700 of earned income will get hit with Social Security taxes for 2020. It is too early to know whether this number will increase again for 2021. With the government running up record deficits due to the Trump Tax Plan, even before the coronavirus recession, I would expect this number to rise again in 2021.
If you are not yet receiving Social Security benefits, do what you can to delay starting benefits. You can take Social Security as early as age 62 and as late as age 70. The larger your Social Security benefit, the larger your COLA adjustment will be each year, in absolute dollar terms.
There is never a better time than today to get on track for a secure retirement. As you can see, trying to live off Social Security, alone, will not allow many Americans to maintain their standard of living in retirement.