Friday, March 19, 2010

Looking Ahead: 2011 Social Security Cost of Living Adjustment

by Bill McBride on 3/19/2010 03:01:00 PM

Given the low inflation reports, I was curious if Social Security benefits would increase in 2011 ... it might be close, but any increase will probably be small. However the contribution base might increase by a larger percentage. Here is an update:

This year (starting in December 2009) was the first time since the automatic cost of living adjustments (COLA) were adopted in 1975 that Social Security benefits did not increase.

This was also the first year the contribution base (currently $106,800) did not increase.

There is a reasonable chance that there will be little or no increase in benefits in 2011 (starting in December 2010).

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 proceeding year 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.

    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.

    Last month (February 2010) CPI-W was at 212.544, so CPI-W will have to increase by more than 1.4% over the next 7 months for benefits to increase - this is possible since this number is not seasonally adjusted, and gas prices usually rise in the summer. However any increase in benefits will probably be very small.

    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 ...
    To summarize (assuming no new legislation):

  • In 2011, for benefits, the increase will be zero or small because the calculation is based on CPI-W in Q3 2008.

  • For the contribution base in 2011, 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.