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 cost-
of-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

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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
174.1 - 169.7 = 4.4
(rounded to the nearest one-tenth of one percent as
4.4 / 169.7 = 2.593%
required by law):
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.

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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. 106-
182), 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-of-
coverage” 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.

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Table 2. History of Social Security Benefit Increases
Amount of increase
Date increase was paid
(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.

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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
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.

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Table 4. Impact of January 2002 COLA on Monthly Benefit Levels
Before
After
2.6%
2.6%
COLA
COLA
Average Social Security monthly benefit levels:
All retired workers
$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
Disabled worker, spouse, and one or more
children
$1,325
$1,360
SSI federal monthly payment standard:
Individual
$531
$545
Couple
$796
$817
Source: Social Security Administration, October 19, 2001.