If you’re among the nearly 70 million people receiving Social Security benefits, you might be wondering what, if any, cost of living adjustments (COLA) you’ll receive in 2021.
The government won’t officially announce the next COLA until October, but experts are predicting a small raise or none at all.
“It’s really tough to say what Social Security’s COLA may be for 2021, given that we’re in uncharted territory with the economy at the moment,” said Jim Blankenship, author of “A Social Security Owner’s Manual.”
Social Security’s general benefit increases have been based on increases in the cost of living, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
COLAs are based on increases in the CPI-W from the third quarter of the prior year to the corresponding quarter of the current year in which the COLA became effective. For the 11 years ending 2019, the benefits rose 1.4% on average. However, there were three years during that period when the COLA was 0%: 2009, 2010, and 2015.
Currently, the year-over-year increase in the CPI-W through the second quarter of 2020 is 0.15%.
“Assuming nothing dramatic occurs in the third quarter, my best guess is that the COLA may at best be around 0.5%,” said Blankenship. “But in the end, the COLA could be zero, if there’s price deflation with potential COVID-19 flare-ups.”
If a 0.5% increase happens, the average Social Security beneficiary who receives $1,503 a month will see a monthly increase of about $7.50, according to Blankenship.
Hold harmless clause to the rescue
If there is any good news in a little-to-no COLA, it’s that most Medicare beneficiaries fall under the “hold harmless” clause.
That means Medicare premiums could not go up more than the dollar increase to the recipient’s Social Security benefits, said Blankenship. “The downside is that the entire increase would go to Medicare premiums, however, for most Social Security recipients, meaning a net-zero COLA when all is said and done,” he said.
The standard Medicare Part B premium is expected to rise 2.7% (or $3.90) to $148.50 per month in 2021 from $144.60 per month in 2020.
Look for premium relief
Given a no-to-low Social Security COLA, David Freitag, a financial planning consultant with Mass Mutual, said beneficiaries should look for “premium relief” by comparing traditional Medicare to Medicare Advantage.
“This requires a top-to-bottom review of benefits and deductibles to see which platform might be best for their lifestyle and health,” he said.
Another idea for those on traditional Medicare: Purchase a Medigap (Medicare Supplement Insurance) policy that increases the deductible amounts. “For example, if you are on the Medicare Supplement F plan, by moving to the G plan there will be a premium saving,” said Freitag.
And if you’re paying for Part B premiums directly to Medicare, you should change this by November to make sure the payment is deducted from your monthly Social Security check, according to William Reichenstein, co-author of “Social Security Strategies: How to Optimize Retirement Benefits.”
Now is also a good time to start evaluating your choices for Medicare plans. “When open enrollment season arrives October 15, you will be well prepared to adjust your plans for 2021,” said Freitag.
Plan for a zero (net) COLA
As with all financial planning considerations, Blankenship recommends reviewing your expenses and making the cuts where you can. Likewise, review all other possible income sources to augment your household needs if possible.