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Your Social Security check will be just 1.6% higher in 2020 than it is this year. Are you disappointed?
Many retirees appear to be. Their disappointment is being fueled by media coverage of the announcement last week from the Social Security Administration. That coverage has largely focused on the 2020’s COLA being lower than the 2.8% COLA in 2019 and the 2.0% in 2018.
In fact, however, these media stories—as well as many retirees—are interpreting the latest COLA all wrong.
That’s because the COLA is a nominal, not a real, number. The issue isn’t how big the COLA is in itself, but its magnitude in relation to inflation.
Over the last 12 months, for example, inflation has risen at almost the same pace as the recently-announced COLA. That’s not an accident, of course, since that is how the COLA is calculated. But to bemoan the lower COLA for 2020 is really nothing more than to bemoan inflation being lower.
Is that really something you want to complain about? After all, among all groups in society, the group that undoubtedly suffers the most from higher inflation is retirees.
Take the 2.0% COLA in 2018, which recent news stories have used to put the recent COLA in a negative light. Over the year prior to that 2018 COLA, inflation (at least by some definitions) rose at an even faster pace. So you could quite plausibly argue that seniors were worse off after that year’s COLA than they will be after this coming year’s.
When looked at this way, 1.6% may very well be better than 2.0%.
This illustrates the misunderstandings caused by confusing nominal with real (or inflation-adjusted) rates. Economists call it “money illusion.” It leads to no end of false or misleading analyses.
Of course, there is more than one way of adjusting for inflation, and many believe the Social Security Administration (SSA) should be using a different definition. But that should be what retirees’ focus on, not what the COLA is in nominal terms.
To calculate each year’s COLA, the SSA currently uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (known as CPI-W). That measure is different than the more widely-reported Consumer Price Index (formally known as CPI-U, the CPI for “all urban consumers”). Retiree spending rises at a much faster pace than for non-retirees, after all.
How good a job does CPI-W do reflecting retiree inflation? On the one hand, it has not lagged the better-known CPI-U over the long term. In fact, since June 1975, which is when the Social Security Act designated that the CPI-W be the basis for Social Security COLAs, it has risen at a 0.1% annualized percentage point more than the CPI-U—3.7% instead 3.6%.
On the other hand, it has not kept up with measures of inflation that more specifically reflect the experience of retirees. One such measure is the CPI for the Elderly, or CPI-E, calculated by the Bureau of Labor Statistics, the same outfit that calculates the other versions of the CPI. Over the last four decades, the CPI-E has risen slightly faster than the CPI-W—by an annualized average of 0.2 percentage points.
Significant as that is, its impact shouldn’t be exaggerated. I calculate that, had the CPI-E been used over the last 20 years instead of the CPI-W, the average Social Security monthly benefit would be about $60 more than it is currently—around $1,520 instead of $1,461. That’s nothing to sneeze at, of course, but far different than the argument made by some that Social Security benefits have lost 34% of their purchasing power since the turn of the century.
It very well may be the case that Social Security benefits should be much higher than they are now, as many argue. But if so, that argument should be made directly, rather than urging the increase in the name of inflation adjustment.
The goal of each year’s COLA should be to preserve purchasing power rather than to increase it.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. Hulbert can be reached at mark@hulbertratings.com.
