Wednesday, October 19, 2011

2012 Social Security Cost-Of-Living Adjustment approximately 3.6% increase

by Bill McBride on 10/19/2011 09:40:00 AM

I'll have more on prices later ...

The BLS reported this morning: "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 4.4 percent over the last 12 months to an index level of 223.688 (1982-84=100)."

CPI-W is the index that is used to calculate the Cost-Of-Living Adjustments (COLA). Here is an explanation:

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.

• In 2011, the Q3 average of CPI-W was 223.233. This is above the Q3 2008 average, and COLA will increase around 3.6% for next year (the current 223.233 divided by the Q3 2008 level of 215.495).

Of course medicare premiums will increase too.

Contribution and Benefit Base

Since COLA increased, 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 for 2010 was $41,673.83 and the index for 2007 was $40,405.48. So $41,673.83 divided by $40,405.48 multiplied by $106,800 is approximately $110,000.

So the contribution base will increase to around $110,000 in 2012.

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