Social Security COLA for 2020: Will trade wars increase SSA’s projection?

The tariffs the Trump administration is imposing on imported goods from China have infused uncertainty in the economy and capital markets, but they haven’t resulted in marked inflation.

Nor is the latest tranche of tariffs expected to spike inflation by the end of the third quarter this year, the period the Social Security Administration uses to assess the Cost of Living Adjustment for Social Security beneficiaries, according to one economist.

“The trade war certainly creates some additional uncertainty, but perhaps not as much as one might think,” said Eric Gaus, an economist with Moody’s Analytics, a provider of financial analytics.

The impact tariffs have on the cost of goods, and ultimately inflation, will likely be manifested after the third quarter, added Gaus. The COLA is based on the year-over-year third quarter—July, August, and September–inflation number.

In April, the SSA forecasted a 1.8 percent COLA for Social Security beneficiaries in 2020.

A 25 percent tariff on $50 billion of Chinese imports was imposed in July of 2018. In September, a 10 percent tariff was placed on $200 billion worth of Chinese goods, with a scheduled increase to 25 percent by the end of 2018.

That increase was delayed as negotiations between the world’s two largest economies commenced. But talks broke down, and in May, the U.S. raised the 10 percent tariff to 25 percent.

So far, the tariffs have had a minimal impact on inflation—less than 0.1 percent since the initiation of the new levies last July, said Gaus.

“Before, I might have been swept up in the thinking that the result on inflation would be worse,” he said. “But in hindsight, the numbers make sense. The increases in costs are getting eaten up in the supply chain, so that by the time goods reach consumers there is very little impact.”

Gaus does caution that the trade war’s impact on inflation could change, and quickly, just not by the end of the summer.

“We anticipate the latest increase to 25 percent will have a larger impact, but it will take a while. It took a year for the impact of the first tranche of tariffs to take effect—the peak impact was seen about six or seven months later,” said Gaus.

Last year, corporations had the benefits of dramatically reduced tax rates under the Tax Cuts and Jobs Act and an economy that was stronger than it is now. Large companies, like Apple, were also able to nimbly re-source supply chains outside of China.

“The impact was smoothed over pretty easily,” said Gaus. Going forward, however, there is less “wiggle room” for firms.

Social Security COLAs are based off the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W. Gaus does not track the CPI-W, but does track the CPI for Urban Consumers, or the CPI-U. The two indices are highly correlated, with the CPI-W tending to come in slightly under the CPI-U by about 0.035 percent.

Moody’s Analytics is forecasting a 2.03 increase in the CPI-U under its baseline forecast, which assumes that the U.S. and China exit the trade war “gracefully,” said Gaus.

If the trade war continues at its current levels, inflation could bump up, perhaps adding five basis points, but that would not be seen until 2020, well after the SSA will announce its COLA increase in October.

The wild card that could impact the COLA in the immediate term is what Gaus calls a “trade conflagration.” This month, China implemented new tariffs on $60 billion worth of U.S. imports. The Trump administration has threatened new 25 percent tariffs on a third tranche of Chinese imports.

“That’s where we would see the impact on inflation quickly and directly on consumer goods,” said Gaus. “Right now the impact is on intermediate goods. When tariffs are placed directly on consumer goods, you will start seeing an immediate impact on prices.”

An escalating trade war could lead to a 25 basis point increase to inflation, a scenario that could result in a larger difference between the Social Security Administration’s projection and the realized COLA, added Gaus.

President Trump and Chinese president Xi Jinping are scheduled to meet at the G-20 summit in Japan this week. A trade deal is not expected to be fully brokered, but it is hoped that negotiations could be reopened, cooling the threat to an immediate escalation in the tariff war.

“There’s no schedule for tariffs on new goods—it’s the club we are holding to bring China to the table and make sure they are acting in good faith,” explained Gaus.

In March of 2019, the average retiree received $1,467.17 in Social Security benefits, according to the SSA’s latest Trustees’ report. A 1.8 percent COLA increase would amount to a $26.41 monthly raise for retirees.

Last year’s COLA was 2.8 percent. In 2008, the COLA was 5.8 percent, the highest in increase since 1982.

About 64 million Americans will receive over $1 trillion in Social Security benefits in 2019. Roughly 43.7 million beneficiaries are retirees.

Social Security accounts for 33 percent of income for the country’s elderly, according to the SSA.

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