Order Code 94-803 EPW Updated October 16, 2008 Social Security: The Cost-of-Living Adjustment in January 2009 Gary Sidor Information Research Specialist Knowledge Services Group http://wikileaks.org/wiki/CRS-94-803 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 payments always reflect the benefits due for the preceding month). The 5.8% COLA payable in January 2009 was triggered by the rise in the CPI-W from the third quarter of 2007 to the third quarter of 2008. 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 will also receive a 5.8% COLA in January 2009. 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 payments always reflect the benefits due for the preceding month). CRS-2 The January 2009 COLA The amount of the January 2009 COLA became known on October 16, 2008, when the BLS announced the September 2008 CPI-W figure. The release of the September 2008 index amount made the comparison of the two July-September sets of CPI-W figures needed to compute the COLA (one for 2007 and another for 2008) possible. Table 1 shows how the January 2009 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 2009 http://wikileaks.org/wiki/CRS-94-803 CPI-W Index Points July 2007 203.700 August 2007 203.199 September 2007 203.889 Average for Third Quarter of 2007 (rounded to the nearest one-thousandth of 1%): 203.596 July 2008 216.304 August 2008 215.247 September 2008 214.935 Average for Third Quarter of 2008 (rounded to the nearest one-thousandth of 1%): 215.495 Percentage increase from the third quarter average for 2007 to the third quarter average for 2008 (rounded to the nearest one-thousandth of 1% for initial calculations, but rounded to the nearest one-tenth of 1% for the final application, as required by law): 215.495 - 203.596 = 11.889 11.889 / 203.596 = 5.844% COLA = 5.8% Source: BLS data series for the CPI-W for 2007 and 2008. 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 an amount equivalent to 32.5% of the Social Security COLA. 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 http://wikileaks.org/wiki/CRS-94-803 Their recipients also receive a 5.8% COLA in January 2009.1 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 payroll taxes) will increase to $106,800 in 2009 (from $102,000 in 2008). ! Exempt Amounts Under the Social Security Earnings Test. The exempt amount under the earnings test is the maximum amount of earnings allowed before a Social Security recipient’s benefits are affected. In 2009, for persons who are below the full retirement age (FRA) and will not reach the FRA during that year, the annual exempt amount is $14,160 (up from $13,560 in 2008). There is a withholding of $1 of benefits for every $2 of earnings above this exempt amount. The earnings test no longer applies beginning with the month a recipient reaches the FRA. During the calendar year in which a recipient reaches the FRA, a higher exempt amount applies for those months preceding the individual’s attainment of the FRA. In 2009, for persons who will reach the FRA in that year, the annual exempt amount is $37,680, or $3,140 per month (up from $36,120, or $3,010 per month, in 2008). There is a withholding of $1 of benefits for every $3 of earnings above this exempt amount. Although not triggered by the COLA, other changes are tied to the increase in national average wages. In 2009, the amount of earnings needed for a Social Security “quarter-of-coverage” is $1,090 (up from $1,050 in 2008). The monthly substantial gainful activity amount for the non-blind disabled is $980 (up from $940 in 2008), and the amount for the blind disabled is $1,640 (up from $1,570 in 2008). The annual coverage thresholds for domestic workers and election workers increase by $100 from 2008 levels, to $1,700 and $1,500, respectively. 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 2009 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 http://wikileaks.org/wiki/CRS-94-803 Date Increase Was Paid January 2009 January 2008 January 2007 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 1975b April/July 1974c October 1972 February 1971 February 1970 March 1968 February 1965 February 1959 October 1954 October 1952 October 1950 Amount of Increase (shown as a percentage) 5.8 2.3 3.3 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 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 January 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 http://wikileaks.org/wiki/CRS-94-803 Year Effective 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994a 1993 1992 1991b 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 1974 1973 1972 1968-1971 1966-1967c 1959-1965 1955-1958 1951-1954 1937-1950 Taxable Earnings Base OASDI HI $106,800 All earnings 102,000 All earnings 97,500 All earnings 94,200 All earnings 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. b. The HI taxable earnings base was raised to $125,000 as a revenue-raising measure in the Omnibus Budget Reconciliation Act of 1990. c. 1966 was the first year in which the HI tax was levied. CRS-6 Table 4. Impact of January 2009 COLA on Monthly Benefit Levels Before 5.8% COLA After 5.8% COLA All retired workers $1,090 $1,153 Aged couple, both receiving benefits $1,773 $1,876 Widowed mother and two children $2,268 $2,399 Aged widow(er) alone $1,051 $1,112 All disabled workers $1,006 $1,064 Disabled worker, spouse, and one or more children $1,695 $1,793 Individual $637 $674 Couple $956 $1,011 Average Social Security monthly benefit levels: http://wikileaks.org/wiki/CRS-94-803 SSI federal monthly payment standard: Source: Social Security Administration, October 16, 2008.