by Calculated Risk on 8/23/2009 11:34:00 AM

For something a little different ...

For the first time since the automatic cost of living adjustments (COLA) were adopted in 1975, Social Security benefits will not increase in December 2009. This also means the contribution base (currently $106,800) will not increase in 2010.

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

Click on graph for larger image in new window.

This graph shows the cost of living adjustments for social security benefits since 1975 (increases start in December, but are mostly for the following year).

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 gives an increase of 5.8%.

Since Q3 2008 CPI-W has fallen - to 210.526 in July - and CPI-W will certainly be below 215.295 in August and September.

Instead of cutting benefits by the change in CPI-W, the benefits will stay the same for 2010.

However, 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 could increase 2.3% over the next year, and there would be no increase in Social Security benefits in 2011.

Contribution and Benefit Base

In addition, this means the contribution base will not increase in 2010. Although the base is calculated using the National Average Wage Index, the law - as currently written - prohibits an increase in the contribution and benefit base if COLA is not greater than zero.

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 ...

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

However, 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).

Note: It seems very likely that the base in 2011 will be increased by new legislation, so this probably will not matter - but it does matter for 2010.

⁽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.