Social Security Annual Cost of Living Adjustment

[W. Gray]

In relation to the annual Social Security Cost of Living Adjustment (COLA) that someone mentioned on another thread:

The Social Security web site has a formula for calculating the projected annual COLA. The formula uses the Department of Labor Consumer Price Index for Urban Wage Earners and Clerical Workers, commonly called CPI-W. The Labor Department releases a monthly index amount for this group that takes into consideration food costs, housing costs, clothing, transportation, recreation, education, and personal care.

In general, the COLA is equal to the percentage increase in the computed CPI-W index for the third quarter of one year to the computed index of the third quarter of the next year.

Social Security adds the CPI-W index for each of the months in the third quarter of the current year (July, August, and September) and computes the average.

Then they add the CPI-W index numbers of the months in the third quarter of last year and compute that average. Subtracting last year's average from this year's average and rounding to the nearest tenth gives the increase.

The increase on January 1, 2008 was 2.3%.

The Labor Department releases CPI-W index numbers to three decimal places but Social Security rounds their computation to one decimal place.

There is no way to tell what the actual increase will be for January 1, 2009, until October 16 when the Department of Labor releases their figures for September. At that time Social Security will tell the world what the COLA will be.

However, one can keep a monthly eye on where the COLA is headed.

Computing the CPI-W index average of the last three actual months and subtracting that average from the average of the months in the third quarter of last year, one can compute the figure as of this month.

At the end of March, it was at 2.023% or 2.0%. This is an increase of over .5% from the previous month. These are my figures. The government does not release interim figures so we have to do our own computations.

The next Department of Labor indexes are due out May 14 for April. It would seem the amount would increase dramatically again.

[sixdogsmom]

Interesting! Thanks! I think! 

[W. Gray]

For whatever it is worth, here are the annual Social Security cost of living adjustments since 1975 when automatic annual increases were geared to the CPI-W by law.

All increases are effective December 1 of the year noted. December payments are received on January 1.

Prior to 1975, increases were at the discretion of Congress.

Year   COLA
1975   8.0%
1976   6.4%
1977   5.9%
1978   6.5%
1979   9.9%
1980   14.3%
1981   11.2%
1982   7.4%
1983   3.5%
1984   3.5%
1985   3.1%
1986   1.3%
1987   4.2%
1988   4.0%
1989   4.7%
1990   5.4%
1991   3.7%
1992   3.0%
1993   2.6%
1994   2.8%
1995   2.6%
1996   2.9%
1997   2.1%
1998   1.3%
1999   2.5%
2000   3.5%
2001   2.6%
2002   1.4%
2003   2.1%
2004   2.7%
2005   4.1%
2006   3.3%
2007   2.3%


Someone retiring on Social Security in 1974, if they were still alive, would have seen their payment go up by 142.3%.

The biggest increases were during the runaway inflation Jimmy Carter years. Not his fault but he gets the blame.

[W. Gray]

The 142.3% increase is the simple interest increase.

Since each succeeding increase is compounded, the overall increase would be over 400%.

A retiree retiring at $100 per month in 1974 would be getting $407 per month today.