The Social Security cost-of-living adjustment (COLA) for 2020 is 1.6%, the Social Security Administration announced.
The COLA, which went into effect in January, is down from the 2.8% COLA increase retirees and other beneficiaries received at the start of 2019.
What Is a Social Security Cost-of-Living Adjustment? The Social Security Administration (SSA) is required by law to prevent inflation from eroding the buying power of the benefits paid out to nearly 69 million Americans.
It uses a Social Security COLA formula based on the consumer price index to adjust payouts every January.
Since prices typically rise, payouts typically rise also.
If prices ever fell, payouts would stay unchanged until prices catch back up again.
How Is the 2020 Social Security COLA Calculated? Specifically, SSA ties its adjustment for Social Security benefits to the wage earners’ consumer price index, which is similar to, but not exactly the same as, the more commonly reported urban dwellers’ consumer price index.
National average prices are used, not regional.
SSA also calculates the percent change between average prices in the third quarter of the current year with the third quarter of the previous year.
The reason the fourth quarter is not used is because that number is typically not available from the U.S. Bureau of Labor Statistics until mid-January, and the SSA has to make its adjustment on January 1.
The inflation adjustment for 2020 is only 1.6%, reflecting the current low-inflation environment.
Much of the reason for this lower-than-normal inflation is that gasoline prices have dropped 6% over that time, dragging down the overall figure.
This is unlikely to be repeated over the course of the next year, and so inflation will likely pick up to about 2%, causing an upward bump in the 2021 Social Security COLA as well.