You may have heard that the Social Security Administration officially announced that Social Security recipients will receive a 1.6% cost-of-living (COLA) adjustment for 2020. Those increased payments will start in January 2020. The purpose of the COLA is to help the purchasing power of Social Security benefits keep pace with inflation. Congress first enacted the COLA provision as part of the 1972 Social Security Amendments, with automatic annual COLAs began in 1975. Before that, benefits were increased only when Congress enacted special legislation.
The actual amount of the increase is based on a formula using increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This is different than the two more widely-followed official measures of inflation used by the government – the Consumer Price Index (CPI) and Producer Price Index (PPI). And to make matters even more confusing, there are many other inflation indices followed by economists to measure different aspects of inflation and how they impact different consumers and sectors of the economy. Many of these measures of inflation yielded higher rates of increase, which has led educated observers to believe that Social Security will not likely keep pace with the “real” increases in retirees’ costs. Having inflation hedges built into your portfolio can be a critical way to protect your ability to keep pace with inflation throughout retirement.