originally posted at Calculated Risk
re-posted with permission from the author
Dan here…there might be a lot of noise about no increase due to cost of living adjustment (cola), but here is part one of three excellent posts on why it works this way for no inflation:
Update: Updated links and formatting made 3:00 PM.
Calculated Risk writes:
The BLS reported this morning that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was at 213.898 in July. This means it is very likely there will no change to Social Security Benefits and the Maximum Contribution Base again this year.
Here is an explanation …
The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W1 for the three months in Q3 (July, August, September) and compares to the average for the highest previous average of Q3 months. Note: this is not the headline CPI-U.
•In 2007, the average of CPI-W was 203.596. In 2008, the average was 215.495. That gave an increase of 5.8%.
•In 2009, the Q3 average of CPI-W was 211.013. That was a decline of -2.1% from 2008, however, by law, the adjustment is never negative – so the benefits remained the same this year.
This graph shows CPI-W over the last ten years. The red lines are the Q3 average of CPI-W for each year.
The COLA adjustment is based on the increase from Q3 of one year from the highest previous Q3 average. So a 2.3% increase was announced in 2007 for 2008, and a 5.8% increase was announced in 2008 for 2009.
In Q3 2009, CPI-W was lower than in Q3 2008, so there was no change in benefits for 2010.
Even though there was no increase last year, and there will probably be no increase this year, those receiving benefits are still ahead because of the huge increase in Q3 2008.
For 2011, the calculation is not based on Q3 2010 over Q3 2009, but Q3 2010 over the highest preceding Q3 average … the 215.495 in Q3 2008. This means CPI-W in Q3 2010 has to average above 215.495 or there will be no increase in Social Security benefits in 2011.
In July 2010, CPI-W was at 213.898, so CPI-W will have to average above 216.294 in August and September for the Q3 average to be at or above Q3 2008. That suggests an increase in COLA is very unlikely right now.
Contribution and Benefit Base
The law – as currently written – prohibits an increase in the contribution and benefit base if COLA is not greater than zero. However if the there is even a small increase in CPI-W, the contribution base will be adjusted using the National Average Wage Index.
From Social Security: Cost-of-Living Adjustment Must Be Greater Than Zero
… … any amount that is directly dependent for its value on the COLA would not increase. For example, the maximum Supplemental Security Income (SSI) payment amounts would not increase if there were no COLA.
… if there were no COLA, section 230(a) of the Social Security Act prohibits an increase in the contribution and benefit base (Social Security’s maximum taxable earnings), which normally increases with increases in the national average wage index. Similarly, the retirement test exempt amounts would not increase …
This is based on a lag. If there had been an increase in COLA last year, the contribution and benefit base would have increased by about 2.3% based on the increase in wages from 2007 to 2008. The National Average Wage Index is not available for 2009 yet, but wages probably declined – but it probably won’t matter for the maximum contribution base since COLA will probably be zero.
To summarize (assuming no new legislation):
•In 2011, for benefits, there will probably be no increase (although we need to see CPI-W for August and September to know for sure).
•For the contribution base in 2011 there will probably be no change too. However, if the COLA is even slightly positive, the increase will be based on changes in the national average wage index (not COLA).
(1) CPI-W usually tracks CPI-U (headline number) pretty well. From the BLS:
The Bureau of Labor Statistics publishes CPIs for two population groups: (1)the CPI for Urban Wage Earners and Clerical Workers (CPI-W), which covers households of wage earners and clerical workers that comprise approximately 32 percent of the total population and (2) the CPI for All Urban Consumers (CPI-U) … which cover approximately 87 percent of the total population and include in addition to wage earners and clerical worker households, groups such as professional, managerial, and technical workers, the self- employed, short-term workers, the unemployed, and retirees and others not in the labor force.