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Wednesday, August 12, 2020

Early Look at 2021 Cost-Of-Living Adjustments and Maximum Contribution Base

by Calculated Risk on 8/12/2020 10:14:00 AM

The BLS reported this morning:

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 1.0 percent over the last 12 months to an index level of 252.636 (1982-84=100). For the month, the index rose 0.6 percent prior to seasonal adjustment.
CPI-W is the index that is used to calculate the 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).

• In 2019, the Q3 average of CPI-W was 250.200.

The 2019 Q3 average was the highest Q3 average, so we only have to compare Q3 this year 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).

CPI-W was up 1.0% year-over-year in July, and although this is very early - we need the data for August and September - my current guess is COLA will probably increase over 1% this year, but lower than the 1.6% last year, and the smallest increase since 2016.

Contribution and Benefit Base

The contribution base will be adjusted using the National Average Wage Index. This is based on a one year lag. The National Average Wage Index is not available for 2019 yet, but wages probably increased again in 2019. If wages increased the same as in 2018, then the contribution base next year will increase to around $142,700 in 2021, from the current $137,700.

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