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- The first table above shows the history of Cost-of-Living Adjustments (COLA) for Social Security. While adjustments have historically been at least one percent per year, the last two years were an exception—there was no change in benefits for the cost of living in 2009 and 2010. However, we expect a bump up in 2011.
- COLAs are based on the CPI-W, the consumer price index for Urban Wage Earners and Clerical Workers which differs slightly from the CPI-U, an index covering all urban consumers, which is typically covered in the media as consumer price inflation. Inflation in the CPI-W tends to be a bit higher than in the CPI-U.
- While the CPI-W is currently up 4.1 percent in May 2011 over May 2010, the increase in the COLA will not be that large even if inflation stays on its current path. Here’s why.
- The price index declined in 2009 and 2010, but social security does not do a “negative” COLA. This is good news for beneficiaries who will never see the dollar amount of benefits go down due to deflation. To keep costs in check, though, the government makes future cost of living adjustments based on the level of the price index when benefits were last increased. Therefore, while the average CPI-W for the third quarter of 2010 was 214.136, any adjustment in 2011 will be based on the average CPI-W for the third quarter of 2008 which was 215.495.
- For example, in May 2011, the CPI-W was 222.954, 4.1 percent above the 3rd quarter of 2010, but only 3.5 percent above the 4rd quarter of 2011. If the CPI-W were adjusted based on the May data, the cost of living adjustment would be 3.5 percent.
- Based on the likely path of the CPI-W in the coming months, COLA is expected to be 3 to 4 percent in 2011. If monthly inflation runs higher than it was in May, and it has been for the last year, the adjustment could be even greater.
- While a higher COLA is good news for beneficiaries, it increases the cost of social security to the government. In the 2011 Trustees Report, the Trustees projected that the trust funds for social security would be exhausted and benefits could not be 100 percent paid by 2036. However, under the Trustees’ “high-cost” assumptions, the COLA in 2011 is only 1.2 percent. As shown below, NAR projects that the COLA will be even higher, meaning that on its current path, social security is likely to run into trouble even sooner than projected.
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