Thursday, September 15, 2011

Early Look: 2012 Social Security Cost-Of-Living Adjustment on track for 3.5% increase

by Bill McBride on 9/15/2011 03:43:00 PM

The BLS reported this morning: "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 4.3 percent over the last 12 months to an index level of 223.326 (1982-84=100)."

CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). Here is an explanation (much of the following is a repeat from a previous post updated with current data):

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, and not seasonally adjusted.

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

This graph shows CPI-W since January 2000. The red lines are the Q3 average of CPI-W for each year.

• In 2008, the Q3 average of CPI-W was 215.495. In the previous year, 2007, the average in Q3 of CPI-W was 203.596. That gave an increase of 5.8% for COLA for 2009.

• 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 in 2010.

• In 2010, the Q3 average of CPI-W was 214.136. That was an increase of 1.5% from 2009, however the average was still below the Q3 average in 2008, so the adjustment was zero.

• CPI-W in July and August 2011 averaged 223.006. This is above the Q3 2008 average, although we still have to wait for the September CPI-W. But if the current level holds, COLA would be around 3.5% for next year (the current 223.006 divided by the Q3 2008 level of 215.495).

This is still early, but we can be pretty sure COLA will increase this year. Of course medicare premiums will increase too.

Contribution and Benefit Base

The law 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 COLA, the contribution base will be adjusted using the National Average Wage Index.

This is based on a one year lag. Since there was no increase in COLA for the last two years, the contribution base has remained at $106,800 for three years. Since COLA will be positive this year, the adjustment this year will use the 2010 National Average Wage Index compared to the 2007 Wage Index. The National Average Wage Index is not available for 2010 yet, and it is possible that wages declined further in 2010 and are back to 2007 levels. If so, there will be no increase in the contribution base.

If wages increased to the 2008 level, then the contribution base next year will be increased to around $109,000 to $110,000 from the current $106,800.

Remember - this is an early look and is only for two months in Q3. What matters is average CPI-W during Q3 (July, August and September).

NOTE on CPI-chained: There has been some discussion of switching from CPI-W to CPI-chained for COLA. This will not happen this year, but could impact future Cost-of-living adjustments, see: Cost of Living and CPI-Chained

Weekly Initial Unemployment Claims increased to 428,000
Industrial Production increased 0.2% in August, Capacity Utilization increases slightly
NY and Philly Fed Manufacturing surveys show contraction
Key Measures of Inflation increase in August