Order Code 94-803 EPW Updated October 19, 2004 CRS Report for Congress Received through the CRS Web Social Security: The Cost-of-Living Adjustment in January 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 2.7% COLA payable in January 2005 was triggered by the rise in the CPI-W from the third quarter of 2003 to the third quarter of 2004. 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 2.7% COLA in January 2005. 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 2005 COLA The January 2005 COLA became known on October 19, 2004, when the BLS announced the September 2004 CPI-W figure. With release of the September 2004 index, the two July-September sets of CPI-W figures needed to compute the COLA (one for 2003 and another for 2004) became available. Table 1 shows how the January 2005 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 2005 CPI-W Index Points July 2003 179.6 August 2003 180.3 September 2003 181.0 Average for Third Quarter of 2003 (rounded to the nearest one-tenth of 1%): 180.3 July 2004 184.9 August 2004 185.0 September 2004 185.4 Average for Third Quarter of 2004 (rounded to the nearest one-tenth of 1%): 185.1 Percentage increase from the third quarter average for 2003 to the third quarter average for 2004 (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 = 2.7% Source: BLS data series for the CPI-W for 2003 and 2004. 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 2.7% COLA in January 2005.1 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). ! 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 2005 (up from $11,640 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 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 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 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), 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 2005, the amount of earnings needed for a Social Security “quarter-ofcoverage” is $920 (up from $900 in 2004). The coverage 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 $830 (up from $810 in 2004), and the amount for the blind disabled is $1,380 (up from $1,350 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 2005 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) 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. CRS-5 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.