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Thursday, November 15, 2012

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 all but two years from 1975 to 2012. No adjustment was made in 2010 and 2011. Benefits will be increased by 1.7% in 2013, after an increase of 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. When the average CPI-W for the third quarter of 2011 exceeded that for 2008 by 3.6%, establishing a new benchmark, a COLA was payable in 2012. Because the average CPI-W for the third quarter of 2012 exceeded the average CPI-W for the third quarter of 2011 by 1.7%, the COLA for 2013 will be 1.7%.

Because a COLA of 1.7% will be paid to Social Security beneficiaries in 2013, 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 1.7% COLA in January 2013.

The Congressional Budget Office (CBO) and the trustees for the Social Security trust funds both project annual COLAs beyond 2013.

Date of Report: November 8, 2012
Number of Pages: 9
Order Number: 94-803
Price: $19.95

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