Social Security: Cost-of-Living Adjustments
Gary Sidor
Information Research Specialist
November 8, 2012
Congressional Research Service
7-5700
www.crs.gov
94-803
CRS Report for Congress
Pr
epared for Members and Committees of Congress
Social Security: Cost-of-Living Adjustments
Summary
To compensate for the effects of inflation, Social Security recipients received cost-of-living
adjustments (COLAs) through the legislative process sporadically from 1950 to 1974, and
automatically through a trigger mechanism in all but two years from 1975 to 2012. No adjustment
was made in 2010 and 2011. Benefits will be increased by 1.7% in 2013, after an increase of
3.6% in 2012. 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
that can trigger a change. The Social Security COLA is based on the percentage change in the
index from the highest third calendar quarter average CPI-W recorded (most often, from the
previous year) to the average CPI-W for 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.) If there
is no percentage increase in the CPI-W between the measuring periods, no COLA is payable.
No COLA was payable in January 2010 because the average CPI-W for the third quarter of 2009
did not increase from the average CPI-W for the third quarter of 2008, and again in 2011 because
the average CPI-W for the third quarter of 2010 remained below the average CPI-W for the third
quarter of 2008. When the average CPI-W for the third quarter of 2011 exceeded that for 2008 by
3.6%, establishing a new benchmark, a COLA was payable in 2012. Because the average CPI-W
for the third quarter of 2012 exceeded the average CPI-W for the third quarter of 2011 by 1.7%,
the COLA for 2013 will be 1.7%.
Because a COLA of 1.7% will be paid to Social Security beneficiaries in 2013, identical
percentage increases in Supplemental Security Income (SSI) and railroad retirement “tier 1”
benefits will be paid, and other changes in the Social Security program will be triggered.
Although COLAs under the federal Civil Service Retirement System (CSRS) and the federal
military retirement program are not triggered directly by the Social Security COLA, these
programs use the same measuring period and formula for computing their COLAs. As a result,
their recipients similarly will receive a 1.7% COLA in January 2013.
The Congressional Budget Office (CBO) and the trustees for the Social Security trust funds both
project annual COLAs beyond 2013.
This report is updated annually.
Congressional Research Service
Social Security: Cost-of-Living Adjustments
Contents
How the Social Security COLA Is Determined ............................................................................... 1
The January 2013 COLA ................................................................................................................. 1
Scenario In Which No COLA Is Payable ........................................................................................ 2
What Is Affected Besides Social Security Benefits? ....................................................................... 3
Tables
Table 1. Computation of the Social Security COLA, January 2013 ................................................ 1
Table 2. Average CPI-W for the Third Quarter, 2007-2012 ............................................................. 3
Table 3. History of Social Security Benefit Increases ..................................................................... 5
Contacts
Author Contact Information............................................................................................................. 6
Congressional Research Service
Social Security: Cost-of-Living Adjustments
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 Consumer Price Index for Urban Wage Earners and Clerical Workers
(CPI-W), updated monthly by the Bureau of Labor Statistics (BLS), is the measure that can
trigger a benefit adjustment. The Social Security cost-of-living adjustment (COLA) is based on
the percentage change in the index from the highest third calendar quarter average CPI-W
recorded (most often, from the previous year) to the average CPI-W for the third calendar quarter
of the current year. If the CPI-W triggers a COLA, 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.) A COLA trigger mechanism was first adopted in
P.L. 92-603, the Social Security Amendments of 1972, and triggered COLAs were first payable in
1975.
The January 2013 COLA
On October 16, 2012, BLS announced the September 2012 monthly CPI-W figure, making it
official that there would be a 1.7% Social Security COLA in January 2013. The release of the
September 2012 index amount made the comparison of the two July-September sets of CPI-W
figures needed to compute the COLA (one for 2011 and another for 2012) possible. Table 1
shows how the January 2013 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 2013
CPI-W Index Points
July 2011
222.686
August 2011
223.326
September 2011
223.688
Average for Third Quarter of 2011 (rounded to the nearest one-thousandth of 1%):
223.233
July 2012
225.568
August 2012
227.056
September 2012
228.184
Average for Third Quarter of 2012 (rounded to the nearest one-thousandth of 1%):
226.936
Percentage increase or decrease from the third quarter average for 2011 to the third
quarter average for 2012 (rounded to the nearest one-thousandth of 1% for initial
226.936 – 223.233 = 3.703
calculations, but rounded to the nearest one-tenth of 1% for the final application, when
3.703 / 223.233 = 0.017
positive, as required by law):
1.7%
Social Security cost-of-living adjustment (zero if the percentage change is negative):
1.7%
Source: BLS data series for the CPI-W for 2011 and 2012.
Note: The reference base period for the CPI-W is 1982-1984 (i.e., the period when the index equaled 100).
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Social Security: Cost-of-Living Adjustments
Scenario In Which No COLA Is Payable
The Social Security Act specifies that a COLA is payable automatically if there is an increase in
the average CPI-W for the third quarter of the current year relative to the average CPI-W for the
third quarter of the year in which the “cost-of-living computation quarter” was established. The
cost-of-living computation quarter is the third quarter with the historical and present highest
average CPI-W. From 1975, when this provision became effective, to 2008, a new cost-of-living
computation quarter was established in each subsequent year, which triggered the payment of a
COLA each year.
However, it is possible to have one or more years in which no COLA is payable. If the average
CPI-W for the third quarter of the current year is equal to or less than the average CPI-W for the
cost-of-living computation quarter, no COLA is payable.
For example, the average CPI-W for the third quarter of 2009 was less than the average CPI-W
for the third quarter of 2008 (211.001 and 215.495, respectively). As a result, the authority to pay
an automatic COLA in January 2010 was not triggered and the third quarter of 2008 remained the
cost-of-living computation quarter (i.e., the benchmark) used to determine if a COLA would be
payable in January 2011.1 Though the average CPI-W for the third quarter of 2010 (214.136) was
greater than the average CPI-W for the third quarter of 2009, it did not exceed the average CPI-W
for the third quarter of 2008. The third quarter of 2008 remained the cost-of-living computation
quarter for at least one more year and a COLA was not payable in January 2011.
When the average CPI-W for the third quarter of 2011 (223.233) exceeded that for 2008, a 2012
COLA was triggered and the third quarter of 2011 became the cost-of-living computation quarter.
Now that the average CPI-W for the third quarter of 2012 has exceeded that for the third quarter
of 2011, the index for the 2012 measuring period will be used as the benchmark for a possible
COLA in 2014.2 See Table 2 for a recent history of average CPI-W performance for the third
calendar quarter, and how that has affected changes to the cost-of-living computation quarter and
the triggering of COLA payments in some years.
1 Section 215(i) of the Social Security Act specifies that no COLA is payable in subsequent years until the average
CPI-W for the third quarter of the current year is greater than that for the last cost-of-living computation quarter.
2 The Congressional Budget Office (CBO) and the trustees for the Social Security trust funds both project continued
annual COLAs beyond 2013. For more information, see CBO, The Budget and Economic Outlook: An Update, August
2012, at http://www.cbo.gov/sites/default/files/cbofiles/attachments/08-22-2012-Update_to_Outlook.pdf, p. 52, and
Social Security Administration (SSA), The 2012 Annual Report of the Board of Trustees of the Federal Old-Age and
Survivors Insurance and the Disability Insurance Trust Funds, May 2012, at http://www.ssa.gov/OACT/TR/2012/
tr2012.pdf, pp. 107-108.
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Social Security: Cost-of-Living Adjustments
Table 2. Average CPI-W for the Third Quarter, 2007-2012
Cost-of-Living Computation Quarters and Potential COLAs
New Cost-of-Living
Average CPI-W for the
Computation Quarter
Year
Third Quarter
Established Resulting
COLA
2007 203.596 yes 2.3%
2008 215.495 yes 5.8%
2009
211.001
no (2008 retained)
no COLA
2010
214.136
no (2008 retained)
no COLA
2011 223.233 yes 3.6%
2012 226.936 yes 1.7%
Source: Created by CRS using data from the U.S. Bureau of Labor Statistics
Social Security benefit amounts cannot be reduced if the CPI-W decreases between the
measuring periods. If the performance of the CPI-W does not trigger a COLA, benefits remain
the same (prior to deductions for Medicare Part B and Part D premiums). Most beneficiaries are
also protected from a net reduction in Social Security cash benefits that would be attributed to a
scheduled Medicare Part B premium increase, if there is no COLA payable or if the Medicare
Part B premium increase would exceed the dollar value of an applied COLA. However,
regardless of the triggering of a COLA, beneficiaries could see a decrease in their net payment
amount from year to year as a result of changes in their Medicare Part D selections and the
associated premiums.3
What Is Affected Besides Social Security Benefits?
Social Security COLAs trigger increases in other programs. Supplemental Security Income (SSI)
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. Veterans’ pension benefits most often are increased in the same amount as
Social Security, but legislation must be passed annually for this purpose.4 Although COLAs under
the Civil Service Retirement System (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 determining their COLAs. As a result, their recipients will also receive a 1.7% COLA
in January 2013.5
3 For more information on the impact of Medicare premiums on Social Security benefits, see CRS Report R40561,
Interactions Between the Social Security COLA and Medicare Part B Premiums, by Jim Hahn and Alison M. Shelton.
4 As of November 1, 2012, legislation providing a COLA for veterans’ benefits in 2013 has not been passed by both
chambers of Congress and signed into law by the President.
5 For retirees under the Federal Employees’ Retirement System (FERS), a different formula is applied and the resulting
increases may differ. For more information on the adjustment of federal program benefits for inflation, see CRS Report
R42000, Inflation-Indexing Elements in Federal Entitlement Programs, coordinated by Dawn Nuschler.
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Social Security: Cost-of-Living Adjustments
When a COLA is payable, other Social Security program elements are affected. For example, the
taxable earnings base, the retirement earnings test (RET) exempt amounts, and the substantial
gainful activity (SGA) earnings level for the blind (Social Security disability beneficiaries) can
only be increased when a COLA is payable. Though changes to the taxable earnings base, the
RET exempt amounts, and the SGA limit for the blind are based on the percentage increase in
national average wages (whereas the CPI-W reflects changes in prices), they are linked to the
payment of a COLA. If a COLA is payable, then these amounts increase by the percentage that
the national average wage index has increased. If no COLA is payable, these amounts remain
unchanged, even if the national average wage index experiences positive growth.6 The taxable
earnings base, the RET exempt amounts, and the SGA for the blind had been frozen in 2010 and
2011 when no COLA was payable, but were increased in 2012 and will increase again in 2013.7
Although not linked to the COLA, other changes are tied to the increase in national average
wages. These provisions include the amount of earnings needed for a Social Security “quarter-of-
coverage,” the monthly substantial gainful activity amounts for non-blind Social Security
disability beneficiaries, and the annual coverage thresholds for domestic workers and election
workers. These amounts may be altered even if a COLA is not payable.
Table 3 shows the history of increases in Social Security benefits.
6 Sections 230(a), 203(f)(8), and 223(d)(4)(A) respectively, of the Social Security Act.
7 For more information on the interactions between the taxable earnings base, the RET exempt amounts, the SGA
limits, and other program elements with the COLA, see SSA, October 2012, “Cost-of-Living Adjustment (COLA)
Information for 2013” at http://www.socialsecurity.gov/cola/.
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Social Security: Cost-of-Living Adjustments
Table 3. History of Social Security Benefit Increases
Amount of Increase
Date Increase Was Paid
(shown as a percentage)
January 2013
1.7%
January 2012
3.6
January 2011
0.0
January 2010
0.0
January 2009
5.8
January 2008
2.3
January 2007
3.3
January 2006
4.1
January 2005
2.7
January 2004
2.1
January 2003
1.4
January 2002
2.6
January 2001
3.5
January 2000
2.5a
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
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Social Security: Cost-of-Living Adjustments
Amount of Increase
Date Increase Was Paid
(shown as a percentage)
July 1977
5.9
July 1976
6.4
July 1975b 8.0
April/July 1974c 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.
a. Original y 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.
Author Contact Information
Gary Sidor
Information Research Specialist
gsidor@crs.loc.gov, 7-2588
Congressional Research Service
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