A recent post linked to an article which discussed the upcoming cost-of-living-adjustment (COLA) which the Social Security Administration will apply to retiree benefits in January 2014. The article was negative in nature in that it implied that seniors’ benefits have not kept paced with inflation.
In theory, a COLA is supposed to adjust benefits so as to maintain a constant purchasing power. When prices rise, benefits increase; when prices fall (i.e. deflation) benefits should decrease. That is not exactly how the SSA does things. If there is an increase in the CPI, benefits are adjusted by that percent increase. If the index registers a decrease, benefits remain constant—as what happened in 2010 and 2011. This is not done for economic reasons; but rather political. No politician wants to be seen as cutting a constituent’s benefits, no matter how much economic sense it makes.
Yet when you look at more closely you will see that seniors have fared better than what the article suggests.
The table above compares the benefits based on the SSA’s methodology and what they would be if they were adjusted down if there was deflation. The benefits in 2009 represent a hypothetical retiree’s monthly benefits of $1,000 ($12,000 annual).
The first column shows the Consumer Price Index—Workers (CPI-W) for the past five years. The index used by SSA is the average value of the three months of the third quarter of the calendar year. It calculates the percent change in prices from the previous year’s average. That average—i.e. COLA—is then applied to the following January’s benefits (column 2, % Chg CPI). The third column—COLA—is the official COLA used by SSA.
Retirees did not receive COLAs in 2010 and 2011, so their monthly benefits remained at $1,000. They received 3.6 percent increase in 2012 and 1.7 percent in 2013. The reason the COLA was zero in 2011, despite the 1.5 increase in the index, is the way SSA makes it calculation. The previous high of the index was 215.1 in 2009. Until the index exceeds the previous high, the COLA is zero. The next time the index exceeded the 2009 high was in 2012. The base year used to calculate the percent change was 215.1. The 2011 index (213.9) was used to calculate the year-to-year percent change for 2012.
If the SSA adjusted benefits by the year-to-year movement, benefits would have fallen in 2010 to $979. In 2011, due to the 1.5 percent increase, benefits would have increased by $15 to $994 a month. By 2013, the monthly benefits would be $6 below what the hypothetical retiree actually received.
This hypothetical retiree is better off, despite not receiving a COLA in 2010 and 2011. Though the advantage is only $468 over the past four years, it does make a difference for the federal government as a whole. In 2012 39.2 million Americans received Social Security. Using the average savings, the federal government paid out about $18 billion more in benefits then they would have had benefits been adjusted up and down by the true movement in prices.