Order Code 94-803 EPW
Updated October 18, 200219, 2004
CRS Report for Congress
Received through the CRS Web
Social Security: The Cost-of-Living
Adjustment in January 2003
David Koitz and Geoffrey Kollmann
Updated by 2005
Gary Sidor
Domestic Social Policy Division
Summary
To compensate for the effects of inflation, Social Security recipients receive a costof-living adjustment (COLA) in January of each year. The Consumer Price Index for
Urban Wage Earners and Clerical Workers (CPI-W), updated monthly by the
Department of Labor’s Bureau of Labor Statistics (BLS), is the measure used to compute
the change. The Social Security COLA is based on the percentage change in the average
CPI-W for the third calendar quarter of the previous year to the third calendar quarter
of the current year. The COLA becomes effective in December of the current year and
is payable in January of the following year (Social Security checks always reflect the
benefits due for the preceding month).
The 1.42.7% COLA payable in January 20032005 was triggered by the rise in the CPI-W
from the third quarter of 20012003 to the third quarter of 20022004. This COLA triggers identical
percentage increases in Supplemental Security Income (SSI), veterans’ pensions, and
railroad retirement benefits, and causes other changes in the Social Security program.
Although COLAs under the federal Civil Service Retirement System (CSRS) and the
federal military retirement program are not triggered by the Social Security COLA, these
programs use the same measuring period and formula for computing their COLAs.
Their recipients also receive a 1.42.7% COLA in January 20032005. This report is updated
annually.
How the Social Security COLA Is Determined
An automatic Social Security benefit increase reflects the rise in the cost of living
over roughly a 1one-year period. The CPI-W, updated monthly by the BLS, is the measure
used to compute the change. The Social Security COLA is based on the percentage
change in the average CPI-W for the third calendar quarter of the previous year to the
third calendar quarter of the current year. The COLA becomes effective in December of
the current year and is payable in January of the following year (Social Security checks
always reflect the benefits due for the preceding month).
Congressional Research Service ˜ The Library of Congress
CRS-2
The January 20032005 COLA
The January 20032005 COLA became known on October 18, 200219, 2004, when the BLS
announced the September 20022004 CPI-W figure. With release of the September 20022004 index,
the two July-September sets of CPI-W figures needed to compute the COLA (one for
20012003 and another for 20022004) became available. Table 1 shows how the January 20032005
COLA is computed under procedures set forth in sectionSection 215(i) of the Social Security
Act.
Table 1. Computation of the Social Security COLA, January 20032005
CPI-W Index Points
July 2001
173.8
August 2001
173.8
September 2001
174.82003
179.6
August 2003
180.3
September 2003
181.0
Average for Third Quarter of 20012003 (rounded to
the the
nearest one-tenth of one percent):
174.1
July 2002
176.1
August 2002
176.6
September 2002
177.01%):
180.3
July 2004
184.9
August 2004
185.0
September 2004
185.4
Average for Third Quarter of 20022004 (rounded to
the the
nearest one-tenth of one percent):
176.61%):
185.1
Percentage increase from the third quarter
average for 2001
2003 to the third quarter average for
2002 2004 (rounded to
the nearest one-tenth of one
percent1% as required by law):
176.6 - 174.1 = 2.5
2.5 / 174.1 = 1.435%
COLA = 1.4185.1 - 180.3 = 4.8
4.8 / 180.3 = 2.662%
COLA = 2.7%
Source: BLS data series for the CPI-W for 20012003 and 20022004.
Note: The reference base period for the CPI-W is 1982-1984, i.e., the period when the index equaled 100.
What Else Is Affected Besides Social Security Benefits?
Social Security COLAs trigger increases in other programs. SSI benefits, veterans’
pension benefits, and railroad retirement “tier 1” benefits (equivalent to a Social Security
benefit) are increased by the same percentage as the Social Security COLA. Railroad
retirement “tier 2” benefits (equivalent to a private pension) are increased by 32.5% of the
percentage increase applicable to “tier 1” COLAs. Although COLAs under the CSRS and
the federal military retirement system are not triggered by the Social Security COLA,
these programs use the same measuring period and formula for computing their COLAs.
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Their recipients also receive a 1.42.7% COLA in January 2003.1 The COLA also triggers
1
For retirees under the Federal Employees’ Retirement System (FERS), a different formula is
applied and the resulting increases may differ.
CRS-32005.1 The COLA also triggers
other changes in the Social Security program including the following items indexed to the
increase in national average wages:
Taxable earnings base!
Taxable Earnings Base. The Social Security (or Old-Age, Survivors, and Disability
Disability Insurance — OASDI) taxable earnings base (the maximum
amount of annual earnings
subject to Social Security taxes) will increase
to $8790,000 in 20032005 (from $8487,900 in 2002).
Exempt amounts under2004).
!
Exempt Amounts Under the Social Security earnings testEarnings Test. The exempt
amount under
the earnings test (the maximum annual amount a Social
Security recipient can earn from
work and still receive full benefits) will
rise to $11,520 in 200312,000 in 2005 (up from $11,280 in
2002640 in 2004) for persons who are
below the full retirement age (FRA) and will not reach the
FRA during
the year. For those born prior to 1937, the FRA is 65 years. For those born
in 1938
born in 1940, it is 65 years and twosix months. According to law, the FRA
will gradually increase
to eventually reach 66 years for those born
between 1943 and 1954, and 67 years for those
born in after 1959. The
ages at which the earnings test applies will increase accordingly.
Under Under
the Senior Citizens’ Freedom to Work Act (P.L. 106-182), effective
January 1,
2000, the earnings test no longer applies to recipients
beginning in the month they reach
the FRA. During the calendar year in
which a recipient reacheswill reach the FRA, an annual exempt
amount still
applies for months preceding the attainment of the FRA. Under the law, the
the exempt amount will be $30,720 in 200331,800 in 2005 (up from $30,000 in 2002), 31,080 in 2004),
and will continue to
rise in proportion to the increase in national average
wages.
Although not triggered by COLAs, other changes are tied to the increase in national
average wages. In 20032005, the amount of earnings needed for a Social Security “quarter-ofcoverage” is $890920 (up from $870 in 2002900 in 2004). The coverage threshold for domestic workers
is $1,400 (up from $1,300 in 2002), while the threshold for election workers remains
unchanged at $1,200. The monthly thresholds for domestic workers
and election workers remain unchanged, respectively, at $1,400 and $1,200. The monthly
substantial gainful activity amount for the non-blind
disabled is $800830 (up from $780 in 2002810 in
2004), and the amount for the blind disabled is $1,330
380 (up from $1,300 in 2002350 in 2004).
Tables 2 and 3 show the history of increases in Social Security benefits and the
taxable earnings base. Table 4 shows the effect of the January 20032005 COLA on monthly
benefit levels.
1
For retirees under the Federal Employees’ Retirement System (FERS), a different formula is
applied and the resulting increases may differ.
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Table 2. History of Social Security Benefit Increases
Date increase was paidIncrease Was Paid
Amount of increase
(shown as a percentage)
January 2003
1.4
January 2002
2.6
January 2001
3.5
January 2000
2.5*
January 1999
1.3
January 1998
2.1
January 1997
2.9
January 1996
2.6
January 1995
2.8
January 1994
2.6
January 1993
3.0
January 1992
3.7
January 1991
5.4
January 1990
4.7
January 1989
4.0
January 1988
4.2
January 1987
1.3
January 1986
3.1
January 1985
3.5
January 1984
3.5
July 1982
7.4
July 1981
11.2
July 1980
14.3
July 1979
9.9
July 1978
6.5
July 1977
5.9
July 1976
6.4
July 1975**
8.0
April/July 1974***
11.0
October 1972
20.0
February 1971
10.0
February 1970
15.0
March 1968
13.0
February 1965
7.0
February 1959
7.0
October 1954
13.0
October 1952
12.5
October 1950
77.0
Source: Social Security Administration.
*Originally computed as 2.4%, the COLA payable in January 2000 was corrected to 2.5%
under P.L. 106-554.
**Automatic COLAs began.
***Increase came in two steps.
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Table 3. Social Security and Medicare Hospital Insurance Taxable
Earnings Bases Since the Beginning of the Programs
Taxable earnings base
Year effective
OASDI
HI
2003
$87,000
All earnings
2002
84,900
All earnings
2001
80,400
All earnings
2000
76,200
All earnings
1999
72,600
All earnings
1998
68,400
All earnings
1997
65,400
All earnings
1996
62,700
All earnings
1995
61,200
All earnings
1994a
60,600
All earnings
1993
57,600
$135,000
1992
55,500
130,200
a
1991
53,400
125,000
1990
51,300
51,300
1989
48,000
48,000
1988
45,000
45,000
1987
43,800
43,800
1986
42,000
42,000
1985
39,600
39,600
1984
37,800
37,800
1983
35,700
35,700
1982
32,400
32,400
1981
29,700
29,700
1980
25,900
25,900
1979
22,900
22,900
1978
17,700
17,700
1977
16,500
16,500
1976
15,300
15,300
1975
14,100
14,100
1974
13,200
13,200
1973
10,800
10,800
1972
9,000
9,000
1968-1971
7,800
7,800
1966-1967b
6,600
6,600
1959-1965
4,800
—
1955-1958
4,200
—
1951-1954
3,600
—
1937-1950
3,000
—
Source: Social Security Administration.
a
The HI taxable earnings base was eliminated by the Omnibus Budget Reconciliation
Act of 1993. In 1991, it was raised to $125,000 as a revenue-raising measure in
the Omnibus Budget Reconciliation Act of 1990.
b
1966 was first year in which the HI tax was levied.
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Table 4. Impact of January 2003 COLA on Monthly Benefit Levels
Before
1.4%
COLA
After
1.4%
COLA
$882
$895
Aged couple, both receiving benefits
$1,463
$1,483
Widowed mother and two children
$1,812
$1,838
Aged widow(er) alone
$850
$862
All disabled workers
$822
$833
$1,376
$1,395
Individual
$545
$552
Couple
$817
$829
Average Social Security monthly benefit levels:
All retired workers
Disabled worker, spouse, and one or more
children
SSI federal monthly payment standard:
Source: Social Security Administration, October 18, 2002Increase
(shown as a percentage)
January 2005
January 2004
January 2003
January 2002
January 2001
January 2000
January 1999
January 1998
January 1997
January 1996
January 1995
January 1994
January 1993
January 1992
January 1991
January 1990
January 1989
January 1988
January 1987
January 1986
January 1985
January 1984
July 1982
July 1981
July 1980
July 1979
July 1978
July 1977
July 1976
July 1975 b
April/July 1974 c
October 1972
February 1971
February 1970
March 1968
February 1965
February 1959
October 1954
October 1952
October 1950
2.7%
2.1
1.4
2.6
3.5
2.5a
1.3
2.1
2.9
2.6
2.8
2.6
3.0
3.7
5.4
4.7
4.0
4.2
1.3
3.1
3.5
3.5
7.4
11.2
14.3
9.9
6.5
5.9
6.4
8.0
11.0
20.0
10.0
15.0
13.0
7.0
7.0
13.0
12.5
77.0
Source: Social Security Administration.
a. Originally computed as 2.4%, the COLA payable in Jan. 2000 was corrected to 2.5%
under P.L. 106-554.
b. Automatic COLAs began.
c. Increase came in two steps.
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Table 3. Social Security and Medicare Hospital Insurance
Taxable Earnings Bases Since the Beginning of the Programs
Year Effective
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994a
1993
1992
1991a
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
1974
1973
1972
1968-1971
1966-1967b
1959-1965
1955-1958
1951-1954
1937-1950
Taxable Earnings Base
OASDI
HI
$90,000
All earnings
87,900
All earnings
87,000
All earnings
84,900
All earnings
80,400
All earnings
76,200
All earnings
72,600
All earnings
68,400
All earnings
65,400
All earnings
62,700
All earnings
61,200
All earnings
60,600
All earnings
57,600
$135,000
55,500
130,200
53,400
125,000
51,300
51,300
48,000
48,000
45,000
45,000
43,800
43,800
42,000
42,000
39,600
39,600
37,800
37,800
35,700
35,700
32,400
32,400
29,700
29,700
25,900
25,900
22,900
22,900
17,700
17,700
16,500
16,500
15,300
15,300
14,100
14,100
13,200
13,200
10,800
10,800
9,000
9,000
7,800
7,800
6,600
6,600
4,800
—
4,200
—
3,600
—
3,000
—
Source: Social Security Administration.
a. The HI taxable earnings base was eliminated by the Omnibus Budget Reconciliation Act of 1993.
In 1991, it was raised to $125,000 as a revenue-raising measure in the Omnibus Budget
Reconciliation Act of 1990.
b. 1966 was first year in which the HI tax was levied.
CRS-6
Table 4. Impact of January 2005 COLA on
Monthly Benefit Levels
Before
2.7% COLA
After
2.7% COLA
Average Social Security monthly benefit levels:
All retired workers
$930
$955
Aged couple, both receiving benefits
$1,532
$1,574
Widowed mother and two children
$1,927
$1,979
Aged widow(er) alone
$896
$920
All disabled workers
$871
$895
$1,458
$1,497
Individual
$564
$579
Couple
$846
$869
Disabled worker, spouse, and one or
more children
SSI federal monthly payment standard:
Source: Social Security Administration, Oct. 19, 2004.