Social Security: Cost-of-Living Adjustments
Gary Sidor
Information Research Specialist
November 6, 2013
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 usually receive an annual
cost-of-living adjustment (COLA). Benefits will be increased by 1.5% in 2014, after an increase
of 1.7% in 2013.
Social Security COLAs are based on changes in 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). The COLA equals the growth, if any, 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, establishing a new benchmark, a COLA was payable in 2012. Since the average CPI-W for
the third quarters of 2012 and 2013 exceeded the average CPI-W for the third quarters of each
respective preceding year, 2014 will be the third consecutive year in which a COLA will be paid.
Because a COLA of 1.5% will be paid to Social Security beneficiaries in 2014, 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 1.5% COLA in January 2014.
The Congressional Budget Office (CBO) and the trustees for the Social Security trust funds both
project annual COLAs beyond 2014.
This report is updated annually.
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Social Security: Cost-of-Living Adjustments
Contents
How the Social Security COLA Is Determined ............................................................................... 1
The January 2014 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 2014 ................................................ 1
Table 2. Average CPI-W for the Third Quarter, 2007-2013 ............................................................. 3
Table 3. History of Social Security Benefit Increases ..................................................................... 5
Contacts
Author Contact Information............................................................................................................. 6
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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 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
increase. The Social Security cost-of-living adjustment (COLA) is based on the growth 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. Prior to 1975,
COLAs were approved sporadically by Congress through the adoption of legislation.1
The January 2014 COLA
On October 30, 2013, BLS announced the CPI-W figure for September 2013, the final month of
the third quarter measuring period, allowing the Social Security Administration (SSA) to confirm
that a 1.5% Social Security COLA will be effective in January 2014. The release of the
September 2013 index amount made possible the comparison of the two July-September sets of
CPI-W data needed to compute the COLA (one for 2012 and another for 2013). Table 1 shows
how the January 2014 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 2014
CPI-W Index Points
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 a point):
226.936
July 2013
230.084
August 2013
230.359
September 2013
230.537
Average for Third Quarter of 2013 (rounded to the nearest one-thousandth of a point):
230.327
Percentage increase or decrease from the third quarter average for 2012 to the third
230.327 – 226.936 = 3.391
quarter average for 2013 (rounded to the nearest one-tenth of 1% for the final
3.391 / 226.936 = 0.0149
application, when positive, as required by law):
1.5%
Social Security cost-of-living adjustment (zero if the percentage change is negative):
1.5%
Source: BLS data series for the CPI-W for 2012 and 2013.
Note: The reference base period for the CPI-W is 1982-1984 (i.e., the period when the index equaled 100).
1 The COLA is based on price growth to retain the purchasing power of monthly benefits over time for current
beneficiaries. The initial computation of the base benefit amount for new beneficiaries uses a formula that is linked to
overall wage growth. For more information, see CRS Report R42035, Social Security Primer, by Dawn Nuschler.
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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 the average CPI-W for
the third quarter of the current year is higher than the highest average CPI-W for the third quarter
of past years, which is called the “cost-of-living computation quarter.” 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.
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, 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 2011.2 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.
New cost-of-living computation quarters were subsequently established in 2012 and 2013, when
the average CPI-W for the third quarter of 2012 exceeded that for the third quarter of 2011, and
again when the average CPI-W for the third quarter of 2013 exceeded that for the third quarter of
2012. The index for the 2013 measuring period will be used as the benchmark for comparison in
2014 for a possible COLA in 2015.3 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.
2 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.
3 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, “Social Security Old-Age and Survivors Insurance –
February 2013 Baseline,” February 2013, at http://www.cbo.gov/sites/default/files/cbofiles/attachments/43889-
Social%20Security%20Old-Age%20and%20Survivors%20Insurance.pdf, p. 2, and Social Security Administration
(SSA), The 2013 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and the
Disability Insurance Trust Funds, section on program specific assumptions and methods, May 2013, at
http://www.ssa.gov/OACT/TR/2013/V_C_prog.html#1017422, Table V.C1.
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Social Security: Cost-of-Living Adjustments
Table 2. Average CPI-W for the Third Quarter, 2007-2013
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 (215.495 of 2008 retained)
no COLA
2010
214.136
no (215.495 of 2008 retained)
no COLA
2011 223.233
yes
3.6%
2012 226.936
yes
1.7%
2013 230.327
yes
1.5%
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.4
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.5
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 1.5% COLA in January 2014.6
4 For more information on the impact of Medicare premiums on Social Security benefits, see CRS Report R40082,
Medicare: Part B Premiums, by Patricia A. Davis.
5 As of November 5, 2013, legislation providing a COLA for veterans’ benefits in 2014 has not been enacted.
6 In the Federal Employees’ Retirement System (FERS), the COLA equals the Social Security COLA if inflation is 2%
or less, but is lower than the Social Security COLA otherwise. 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 be
increased only when a COLA is payable. Though changes to those three elements are based on
growth in national average wages (rather than changes in prices), they do not increase if no
COLA is payable, even if average wages grow. If a COLA is payable, then these amounts
increase by the percentage that the national average wage index has increased.7 The taxable
earnings base, the RET exempt amounts, and the SGA for the blind were frozen in 2010 and 2011
when no COLA was payable, but they did increase in 2012 and 2013 and will increase again in
2014.8
Changes in other Social Security elements are tied to the increase in national average wages, yet
may be altered even if a COLA is not payable. These elements 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.
Table 3 shows the history of increases in Social Security benefits.
7 Sections 230(a), 203(f)(8), and 223(d)(4)(A) respectively, of the Social Security Act.
8 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 2013, “Cost-of-Living Adjustment (COLA)
Information for 2014” 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 2014
1.5%
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
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Social Security: Cost-of-Living Adjustments
Amount of Increase
Date Increase Was Paid
(shown as a percentage)
July 1978
6.5
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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