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A Foolish Take: Expect a Much Smaller Pay Jump for Social Security in 2020

The money that Social Security pays older Americans is vital for their financial well-being. A surprisingly large number of retirees get the majority of their income from Social Security, and for more people than you'd think, monthly benefits are the only source of regular income.

Because of this, the annual increase that Social Security makes to retirement benefits is one of the program's most important features. If you're living on a fixed income, then every extra dollar you get from Social Security can mean the difference between making ends meet and going without.

The annual increase, which is referred to as the cost-of-living adjustment (COLA), happens every January. But the way that the Social Security Administration calculates the amount of increase depends on figures that it gets every summer. Specifically, the SSA looks at one particular measure of the Consumer Price Index each month between July and September and then takes the average across the three months. It then compares the result to the three-month average from the previous year. The percentage of the increase, rounded to a 1/10th of a percentage point, is the COLA that will take effect at the beginning of the following year. You can see below what the COLAs have been for Social Security over the past decade.

Data source: Social Security Administration. Chart by author.

Obviously, we don't have yet have inflation figures for the summer of 2019. However, we do have June's reading on the CPI, and if that figure stays where it is over the next three months, then the resulting COLA would come in at 1.4% -- just half of last year's 2.8% increase. If prices rise slightly, then the COLA would be a bit higher, although it's highly unlikely that it would ever get close to last year's figure.

Rising prices do hurt retirees by forcing them to pay more for the things they need, so a large COLA isn't necessarily a good thing if it reflects higher costs. However, given that many retirees see their overall expenses rising consistently regardless, getting a bigger Social Security check can be crucial for them to maintain even a modest standard of living.

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