Wednesday, September 16, 2015

August Update: Early Look at Cost-Of-Living Adjustments indicates NO increase in 2016

by Bill McBride on 9/16/2015 11:21:00 AM

The BLS reported this morning:

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) decreased 0.3 percent over the last 12 months to an index level of 233.366 (1982-84=100). For the month, the index declined 0.2 percent prior to seasonal adjustment.
CPI-W is the index that is used to calculate Cost-Of-Living Adjustments (COLA). 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 is not seasonally adjusted (NSA).

Since the highest Q3 average was last year (Q3 2014), at 234.242, we only have to compare to last year. 

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

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

Note: The year labeled for the calculation, and the adjustment is effective for December of that year (received by beneficiaries in January of the following year).

By law, COLA can't be negative, so if the average for CPI-W is down year-over-year, COLA is set to zero (no adjustment).

CPI-W was down 0.3% year-over-year in August.  We still need the data for September too, but it looks like COLA will be zero this year.

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.

From Social Security: Method for determining the base
The formula for determining the OASDI contribution and benefit base is set by law. The formula is applicable only if a cost-of-living increase becomes effective for December of the year in which a determination of the base would ordinarily be made. ...
This is based on a one year lag. The National Average Wage Index is not available for 2014 yet, but wages probably increased again in 2014. If wages increased the same as last year, then the contribution base next year would be increased to around $120,000 from the current $118,500.  However, if COLA is zero, the contribution base will remain at $118,500.

This is an early look. What matters is average CPI-W for all three months in Q3 (July, August and September).  Based on data for July and August, it appears COLA will be zero.