Friday, September 17, 2010

No increase to Social Security Benefits for 2011 (unofficial)

by Bill McBride on 9/17/2010 11:28:00 AM

It won't be official until the BLS releases the September CPI-W report, but we can already say there will be no increase in Social Security benefits or the Maximum Contribution Base in 2011 (assuming no new legislation).

The BLS reported this morning that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was at 214.205 in August (CPI-W was at 213.898 in July).

Here is an explanation of why there will be no change (some repeated from a post last month):

The calculation dates have changed over time (see Cost-of-Living Adjustments), but the current calculation uses the average CPI-W 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.

    CPI-W and COLA Adjustment Click on graph for larger image in new window.

    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.

    For 2011, the calculation is not based on Q3 2010 over Q3 2009, but based on the average CPI-W for 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 for there to be an increase in Social Security benefits in 2011.

    In July 2010, CPI-W was at 213.898, and in August CPI-W was at 214.205 - so CPI-W would have to increase by almost 2% in September for the Q3 average to be at or above the Q3 2008 average. There is no evidence of a huge surge in inflation this month, so there will be no increase in Social Security benefits in 2011.

    Even though there was no increase last year, and there will be no increase this year, those receiving benefits are still ahead because of the huge increase in Q3 2008.

    Note: See post last month for a discussion of CPI-W and the Contribution Base.

    Now the question is: Will Social Security benefits be flat in 2012 too? That is possible.

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