Here’s how your Social Security cost-of-living adjustment is calculated – and what it could look like in 2021

Personal Finance

People line up outside the Social Security Administration office in San Francisco.

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If you collect Social Security benefits, you’re probably already eagerly waiting to see what your cost-of-living adjustment will be next year.

New, early estimates from The Senior Citizens League, a nonpartisan senior group, point to a possible 1.5% COLA increase for 2021.

In 2020, Social Security recipients got a 1.6% increase. For retired workers, that meant their average monthly benefit increased to $1,503 per month, up from $1,479 per month.

Meanwhile, Social Security COLAs have averaged 1.4% in the past decade.

How those adjustments are calculated

The Social Security Administration generally announces its COLA in October for the following year.

The amount is calculated based on the percentage change for the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. That index comes from the Bureau of Labor Statistics at the Department of Labor.

To calculate the next year’s COLA, the Social Security Administration tracks data from the third quarter of the last year to the third quarter of the current year.

Of note, it is not guaranteed there will be an increase from year to year.

That is because the COLA is equal to the percentage increase in the CPI-W. If there is no increase, then the COLA is zero.

Social Security checks did not go up in 2010, 2011 and 2016.

Meanwhile, in other years, the COLA increase has been well above average. For 2019, the increase was 2.8%. And in 2009, beneficiaries saw a 5.8% bump.

How benefits could shape up in 2021

The Senior Citizens League adjusts its estimates for what next year’s COLA could be throughout the year.

Its latest 1.5% estimate for 2021 is based on data through December 2019 and projected numbers through the third quarter of this year.

Admittedly, that is a very early estimate. Last year at this time, the Senior Citizens League projected the COLA for 2020 could be zero.

The group’s estimates changed throughout last year as new data came out. In September, the Senior Citizens League accurately predicted the COLA for 2020 would be 1.6%.

Much of the COLA estimate and actual adjustment for 2021 will depend on how the economy shapes up in the coming months.

Some key indicators to watch include changes in oil prices and consumer electronics, said Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League.

Overall, the buying power of Social Security benefits has been going down as other expenses go up, the group’s research shows. That’s as Medicare premiums continue to rise, which are generally deducted from benefit checks. Total health-care costs eat up about 25% of retirees’ overall income.

“It has really affected how much they can purchase with their Social Security benefits over time,” Johnson said of rising costs.

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