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Wednesday, October 26, 2011

Social Security: Cost-of-Living Adjustments

Gary Sidor
Information Research Specialist

To compensate for the effects of inflation, Social Security recipients received cost-of-living adjustments (COLAs) through the legislative process sporadically from 1950 to 1974, and automatically through a trigger mechanism in each year from 1975 to 2009. No adjustment was made in 2010 and 2011, but benefits will increase by 3.6% in 2012. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), updated monthly by the Department of Labor’s Bureau of Labor Statistics (BLS), is the measure that can trigger a change. The Social Security COLA is based on the percentage change in the index from the highest third calendar quarter average CPI-W recorded (most often, from the previous year) to the average CPI-W for the third calendar quarter of the current year. The COLA becomes effective in December of the current year and is payable in January of the following year. (Social Security payments always reflect the benefits due for the preceding month.) If there is no percentage increase in the CPI-W between the measuring periods, no COLA is payable.

No COLA was payable in January 2010 because the average CPI-W for the third quarter of 2009 did not increase from the average CPI-W for the third quarter of 2008, and again in 2011 because the average CPI-W for the third quarter of 2010 remained below the average CPI-W for the third quarter of 2008. Because the average CPI-W for the third quarter of 2011 has exceeded that for 2008, a COLA (3.6%) is payable in 2012.

Because a COLA of 3.6% will be paid to Social Security beneficiaries in 2012, identical percentage increases in Supplemental Security Income (SSI) and railroad retirement “tier 1” benefits will be paid, and other changes in the Social Security program will be triggered. Although COLAs under the federal Civil Service Retirement System (CSRS) and the federal military retirement program are not triggered directly by the Social Security COLA, these programs use the same measuring period and formula for computing their COLAs. As a result, their recipients similarly will receive a 3.6% COLA in January 2012.

The Congressional Budget Office (CBO) and the trustees for the Social Security trust funds both project a return to annual COLAs beyond 2012.

Date of Report: October 1
9, 2011
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