Elisa Walker, National Academy of Social Insurance

This morning the Social Security Administration announced that beneficiaries will see a 1.7% cost-of-living adjustment (COLA) beginning in their January 2013 checks. Social Security benefits are automatically adjusted to keep up with the cost of living.

Key points from the release:

  • The 2012 COLA will be 1.7%. That compares to a 3.6% increase for 2011 and no increase at all for 2009 or 2010.
  • This 1.7% increase will take effect for the December benefits, which are payable in January.
  • The COLA calculation is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is produced by the Bureau of Labor Statistics (BLS).
  • The level of taxable maximum earnings for Social Security will increase to $113,700 in 2013, from the current maximum of $110,100 in 2012. About 6 percent of workers will be affected by this increase.

For more information on the CPI data and the COLA calculation, see information provided by the Bureau of Labor Statistics and the Social Security Administration.

Should Social Security’s Cost-of-Living Adjustment Be Changed?
A 2011 NASI fact sheet explores two alternate measures of inflation that could be used for calculating Social Security’s COLAs:

  • The chained CPI is sometimes described as a more accurate measure of inflation for the average consumer. However, it understates the inflation experienced by seniors and disabled Americans, who make up the majority of Social Security beneficiaries, largely because of their relatively high out-of-pocket healthcare costs and their limited ability to make substitutions (such as fuel for food) when prices rise. Switching to a chained CPI would cut Social Security benefits for current and future beneficiaries by gradually eroding their purchasing power over time. On average, the chained CPI grows about 0.3 percentage points more slowly per year than the current COLA. A National Women’s Law Center report finds that the cumulative losses by age 95 for a retiree with average earnings would be nearly $25,000.
  • The CPI-E, an experimental price index for the elderly, more accurately measures the inflation actually experienced by elderly Americans. Adopting the CPI-E for COLA calculations would slightly increase the COLA to reflect the prices that elderly and disabled beneficiaries experience. On average, the CPI-E rises about 0.2 percentage points faster than the current COLA.

The oldest Americans would experience the biggest changes, whether in seeing benefits cut by the chained CPI or increased by the CPI-E. Because Social Security becomes increasingly important at advanced ages (as pensions are eroded by inflation, jobs in retirement end, and savings are depleted), even minor erosion of the purchasing power of benefits is a public policy concern.

Some policymakers, including Erskine Bowles and Alan Simpson, have suggested switching to the chained CPI for the entire federal budget, including Social Security. This would both reduce benefits from programs like Social Security, and increase revenues through the tax code. A second NASI fact sheet, How Would Shifting to a Chained CPI Affect the Federal Budget?, finds that over the next decade, nearly two-thirds of the total impact would come from cuts in Social Security, veterans benefits, federal pensions and Supplemental Security Income, while one third would come from increased general revenues.

Posted on: October 16, 2012

Keywords: Social Security

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