News has come out that Social Security payments will not be increasing this year for the 58,000,000 retirees across the United States. Social Security increases are known as Cost Of Living Adjustments, and social security isn’t the only one that increases because of COLA. Many pension systems, deferred compensation techniques, annuities and even some buy-sell agreements rely on regular Cost of Living Adjustments.
What is a Cost of Living Adjustment (COLA)?
Cost of Living Adjustment is a change in an income stream to provide for inflation or deflation. Generally adjustments are calculated using the CPI or the Consumer Price Index. While COLA is usually derived from the CPI and COLA they are two different calculations. The CPI is calculated by the Bureau of Labor Statistics and is defined as,
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. [Those Goods and Services include:]
- FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
- HOUSING (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture)
- APPAREL (men’s shirts and sweaters, women’s dresses, jewelry)
- TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
- MEDICAL CARE (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services)
- RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
- EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
- OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
You should know by now that since it is a number provided by the Federal Government it can’t be as simple as the definition above. Notice anything missing from above? How about energy costs? Why do they just leave it out? Things also get a little bit more complicated with sub-indices such as the CPI-U and CPI-W.
How is COLA Calculated for Social Security?
Social Security wasn’t always indexed to inflation, but since 1975 the Security Administration has regularly increased monthly payouts.
It is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of one year to the third quarter of the next. If there is no increase, there is no COLA.
According to the AP this is the first year since 1975 without a monthly increase. People seemed to be really angry at the news, but I think it is because they don’t understand how it all works, hopefully this will help out. It doesn’t matter because I am hoping that someone in then next ~37 years will allow me to opt out of social security.
Is this the first sign of the downfall of Social Security?