Order Code 94-803 EPW Updated October 25, 2001 CRS Report for Congress Received through the CRS Web Social Security: The Cost-of-Living Adjustment in January 2002 David Koitz and Geoffrey Kollmann Updated by 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 2.6% COLA payable in January 2002 was triggered by the rise in the CPI-W from the third quarter of 2000 to the third quarter of 2001. 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 2.6% COLA in January 2002. 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 1-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 2002 COLA The January 2002 COLA became known on October 19, 2001, when the BLS announced the September 2001 CPI-W figure. With release of the September 2001 index, the two July-September sets of CPI-W figures needed to compute the COLA (one for 2000 and another for 2001) became available. Table 1 shows how the January 2002 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 2002 CPI-W Index Points July 2000 169.4 August 2000 169.3 September 2000 170.4 Average for Third Quarter of 2000 (rounded to the nearest one-tenth of one percent): 169.7 July 2001 173.8 August 2001 173.8 September 2001 174.8 Average for Third Quarter of 2001(rounded to the nearest one-tenth of one percent): 174.1 Percentage increase from the third quarter average for 2000 to the third quarter average for 2001 (rounded to the nearest one-tenth of one percent as required by law): 174.1 - 169.7 = 4.4 4.4 / 169.7 = 2.593% COLA = 2.6% Source: BLS data series for the CPI-W for 2000 and 2001. 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. Their recipients also receive a 2.6% COLA in January 2002.1 The COLA also triggers other 1 For retirees under the Federal Employees’ Retirement System (FERS), a different formula is applied and the resulting increases may differ. CRS-3 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 $84,900 in 2002 (from 80,400 in 2001). 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 $11,280 in 2002 (up from $10,680 in 2001) for persons who are below the full retirement age (FRA) and will not reach the FRA during the year. (Currently, the FRA is age 65. Beginning in 2003, the FRA will increase gradually, reaching 66 in 2009 and 67 in 2027. The ages at which the earnings test applies will increase accordingly.) Under the Senior Citizens’ Freedom to Work Act (P.L. 106182), effective January 1, 2000, the earnings test no longer applies to recipients beginning in the month they reach the FRA. During the year in which a recipient reaches the FRA, an annual exempt amount still applies for months preceding the attainment of the FRA. Under the law, the exempt amount is $30,000 in 2002, and will rise thereafter 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 2002, the amount of earnings needed for a Social Security “quarter-ofcoverage” is $870 (up from $830 in 2001). The coverage threshold for election workers is $1,200 (up from $1,100 in 2001), while the threshold for domestic workers remains unchanged at $1,300. The monthly substantial gainful activity amount for the non-blind disabled is $780 (up from $740 in 2001), and the amount for the blind disabled is $1,300 (up from $1,240 in 2001). Tables 2 and 3, below, show the history of increases in Social Security benefits and taxable earnings bases. Table 4 shows the effect of the 2001 COLA on benefits. CRS-4 Table 2. History of Social Security Benefit Increases Date increase was paid Amount of increase (shown as a percentage) 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. CRS-5 Table 3. Social Security and Medicare Hospital Insurance Taxable Earnings Bases Since the Beginning of the Programs Taxable earnings base Year effective OASDI HI 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 1991a 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. CRS-6 Table 4. Impact of January 2002 COLA on Monthly Benefit Levels Before 2.6% COLA After 2.6% COLA $852 $874 Aged couple, both receiving benefits $1,418 $1,454 Widowed mother and two children $1,719 $1,764 Aged widow(er) alone $820 $841 All disabled workers $794 $815 $1,325 $1,360 Individual $531 $545 Couple $796 $817 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 19, 2001.