Order Code 94-803 EPW
Updated October 19, 200418, 2005
CRS Report for Congress
Received through the CRS Web
Social Security: The Cost-of-Living
Adjustment in January 20052006
Gary Sidor
Domestic Social Policy DivisionKnowledge Services Group
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 2.74.1% COLA payable in January 20052006 was triggered by the rise in the CPI-W
from the third quarter of 20032004 to the third quarter of 20042005. 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 2.74.1% COLA in January 20052006. 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 one-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 20052006 COLA
The January 20052006 COLA became known on October 19, 200414, 2005, when the BLS
announced the September 20042005 CPI-W figure. With release of the September 20042005 index,
the two July-September sets of CPI-W figures needed to compute the COLA (one for
20032004 and another for 20042005) became available. Table 1 shows how the January 20052006
COLA is computed under procedures set forth in Section 215(i) of the Social Security
Act.
Table 1. Computation of the Social Security COLA, January 20052006
CPI-W Index Points
July 2003
179.6
August 2003
180.3
September 2003
181.02004
184.9
August 2004
185.0
September 2004
185.4
Average for Third Quarter of 20032004 (rounded to the
nearest one-tenth of 1%):
180.3
July 2004
184.9
August 2004
185.0
September 2004
185.4185.1
July 2005
191.0
August 2005
192.1
September 2005
195.0
Average for Third Quarter of 20042005 (rounded to the
nearest one-tenth of 1%):
185.1192.7
Percentage increase from the third quarter average for
20032004 to the third quarter average for 20042005 (rounded to
the nearest one-tenth of 1% as required by law):
185.1 - 180.3 = 4.8
4.8 / 180.3 = 2.662%
COLA = 2.7192.7 - 185.1 = 7.6
7.6 / 185.1 = 4.106%
COLA = 4.1%
Source: BLS data series for the CPI-W for 20032004 and 20042005.
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.
CRS-3
Their recipients also receive a 2.74.1% COLA in January 20052006.1 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. The Social Security (or Old-Age, Survivors, and
Disability Insurance — OASDI) taxable earnings base (the maximum
amount of annual earnings subject to Social Security taxes) will increase
to $90,000 in 2005 (from $87,900 in 2004).
!
94,200 in 2006 (from $90,000 in 2005).
Exempt Amounts Under the Social Security Earnings 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 $12,000 in 2005480 in 2006 (up from $11,640 in 200412,000 in 2005) for persons who are
below the full retirement age (FRA) and will not reach the FRA during
the year2006. For those born prior to 1937, the FRA is 65 years. For those
born in 1940, it is 65 years and six 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
the Under the
Senior Citizens’ Freedom to Work Act (P.L. 106-182), effective
January 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
will reach the FRA, an annual exempt amount still
applies for months preceding the attainment of the FRA. Under the law,
the exempt amount will be $31,800 in 2005 (up from $31,080 in 2004),
preceding the attainment of the FRA. For those born in 1941 and turning
65 at some point in 2006, the FRA is not reached until 65 years and eight
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 after 1959. The ages at which the earnings test applies will
increase accordingly. Under the law, the exempt amount will be $33,240
($2,770 per month) in 2006 (up from $31,800, or $2,650 per month, in
2005), and will continue to rise in proportion to the increase in national average
average wages.
Although not triggered by COLAs, other changes are tied to the increase in national
average wages. In 20052006, the amount of earnings needed for a Social Security “quarter-ofcoverage” is $920970 (up from $900 in 2004). The 920 in 2005). The annual coverage thresholds for domestic workers
workers and election workers remain unchanged, respectively, at $1,400 and $1,200. The monthly
each increase by $100 in 2006, to $1,500 and $1,300,
respectively. The monthly substantial gainful activity amount for the non-blind disabled
is $830860 (up from $810 in
2004830 in 2005), and the amount for the blind disabled is $1,380450 (up from $1,350 in 2004
$1,380 in 2005).
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 20052006 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.
CRS-4
Table 2. History of Social Security Benefit Increases
Date Increase Was Paid
Amount of Increase
(shown as a percentage)
increase
was paid
January 2006
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%
Amount
of increase
(shown as a percentage)
4.1%
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
CRS-5
Date
increase
was paid
Amount
of increase
(shown as a percentage)
March 1968
February 1965
February 1959
October 1954
October 1952
October 1950
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.
CRS-5
Table 3. Social Security and Medicare Hospital Insurance
Taxable Taxable
Earnings Bases Since the Beginning of the Programs
Year Effective
2006
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
Taxable Earnings Base
OASDI
HI
$94,200
90,000
87,900
87,000
84,900
80,400
76,200
72,600
68,400
65,400
62,700
61,200
60,600
57,600
55,500
53,400
51,300
48,000
45,000
43,800
42,000
39,600
37,800
35,700
32,400
29,700
25,900
All earnings
All earnings
All earnings
All earnings
All earnings
All earnings
All earnings
All earnings
All earnings
All earnings
All earnings
All earnings
All earnings
$135,000
130,200
125,000
51,300
48,000
45,000
43,800
42,000
39,600
37,800
35,700
32,400
29,700
25,900
CRS-6
Year Effective
Taxable Earnings Base
OASDI
HI
1979
1978
1977
1976
1975
1974
1973
1972
1968-1971
1966-1967b
1959-1965
1955-1958
1951-1954
1937-1950
22,900
17,700
16,500
15,300
14,100
13,200
10,800
9,000
7,800
6,600
4,800
4,200
3,600
3,000
22,900
17,700
16,500
15,300
14,100
13,200
10,800
9,000
7,800
6,600
—
—
—
—
Source: Social Security Administration.
a. The HI taxable earnings base was eliminated by the Omnibus Budget Reconciliation Act of 1993.
In 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 20052006 COLA on
Monthly Benefit Levels
Before
2.74.1% COLA
After
2.74.1% COLA
Average Social Security monthly benefit levels:
All retired workers
$930
$955963
$1,002
Aged couple, both receiving benefits
$1,532583
$1,574648
Widowed mother and two children
$1,927
$1,979992
$2,074
Aged widow(er) alone
$896
$920929
$967
All disabled workers
$871
$895
$1,458
$1,497902
$939
$1,509
$1,571
Individual
$564
$579579
$603
Couple
$846
$869869
$904
Disabled worker, spouse, and one or
more children
SSI federal monthly payment standard:
Source: Social Security Administration, Oct. 19, 200414, 2005.