Social Security: Cost-of-Living Adjustments

Contents

• How the Social Security COLA Is Determined
• Why No COLA Will Be Paid in January 2016
• Scenario In Which No COLA Is Payable
• What Is Affected Besides Social Security Benefits?

Summary

To compensate for the effects of inflation, Social Security recipients usually receive an annual cost-of-living adjustment (COLA). Because inflation did not increase from 2014 to 2015 according to parameters outlined in the Social Security Act, no COLA is payable in 2016.

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. The absence of a COLA in 2016 marks the third time since this provision took effect in 1975 that a COLA was not triggered and paid. No COLA was payable in January 2010 or January 2011. COLAs were paid from 2012 to 2015.

Because no COLA is payable to Social Security beneficiaries in 2016, there were no increases in Supplemental Security Income (SSI) and railroad retirement "tier 1" benefits. In addition, other changes in the Social Security program were not 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 did not receive a COLA in 2016.

The Congressional Budget Office (CBO) and the trustees for the Social Security trust funds both project annual COLAs beyond 2016.

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Social Security: Cost-of-Living Adjustments

How the Social Security COLA Is Determined

An automatic annual Social Security benefit increase is intended to reflect 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.¹ 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, Congress sporadically approved COLAs through the adoption of legislation.²

Why No COLA Will Be Paid in January 2016

On October 15, 2015, BLS announced the CPI-W figure for September 2015, the final month of the third quarter measuring period, allowing the Social Security Administration (SSA) to announce that no Social Security COLA would be paid in January 2016. The release of the September 2015 index amount made possible the comparison of the two July-September sets of CPI-W data needed to compute the COLA (one for 2014 and another for 2015). Table 1 shows how the determination for a potential January 2016 COLA is computed under procedures set forth in Section 215(i) of the Social Security Act.

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 2011.³ 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 each year from 2012 to 2014, when the average CPI-W for the third quarter of 2012, 2013, and 2014 exceeded that for the third quarter of each preceding year.

The average CPI-W for the third quarter of 2014 (234.242) was used as the benchmark for comparison in 2015 for a possible COLA in January 2016. Since the average CPI-W of 233.278 for the third quarter of 2015 did not exceed that of 234.242 for 2014, no COLA was paid in January 2016—and the cost-of-living computation quarter will remain the third quarter of 2014 for at least one more year, when it will be compared with the average CPI-W for the third quarter of 2016 to determine a potential COLA for January 2017.⁴ 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 COLAs in some years.

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).

The absence of a COLA increase may impact certain Medicare Part B enrollees. For Medicare Part B enrollees who have their Part B premiums withheld from their monthly Social Security benefits, a hold-harmless provision in the Social Security Act (§1839[f]) ensures that their benefits will not decrease as a result of an increase in the Part B premium. In most years, the hold-harmless provision has little impact; however, in a year in which there is a 0% Social Security COLA and a Part B premium increase, the hold harmless provision may apply to a much larger number of people. For example, as a result of a 0% Social Security COLA in 2016, an estimated 70% of Medicare beneficiaries were protected by this provision and their 2016 premiums are same as in 2015. The Bipartisan Budget Act of 2015 (BBA 2015; P.L. 114-74) provided some relief to many—but not all—of the remaining 30% of beneficiaries not covered by the hold harmless provision.⁵

However, regardless of the COLA, beneficiaries may see a net reduction in Social Security benefits as a result of changes in their Medicare Part D selections and the associated premiums.⁶

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 or are held constant when a COLA is not paid to Social Security beneficiaries. Railroad retirement "tier 2" benefits (equivalent to a private pension) are increased by an amount equivalent to 32.5% of the Social Security COLA. If no COLA is paid to Social Security beneficiaries, then the railroad retirement tier 2 benefits are not increased. Veterans' pension benefits most often are increased in the same amount as Social Security, but legislation must be passed annually for this purpose.⁷

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 also did not receive a COLA in January 2016, nor did recipients of Federal Employees' Retirement System (FERS) benefits.⁸

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 (which applies to 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.⁹ The taxable earnings base, the RET exempt amounts, and the SGA for the blind were unchanged in 2010 and 2011 when no COLA was payable, and these program elements did not increase in 2016.¹⁰

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 Social Security COLAs.

Author Contact Information

Acknowledgments

[author name scrubbed], CRS technical information specialist, was the previous author of this report.

Footnotes

1.	For more information on using the CPI-W and considering an alternate inflation index, see CRS Report R43363, Alternative Inflation Measures for the Social Security Cost-of-Living Adjustment (COLA), by [author name scrubbed].
2.	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 [author name scrubbed].
3.	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.
4.	The Congressional Budget Office (CBO) and the trustees for the Social Security trust funds both project continued annual COLAs beyond 2016. For more information, see CBO, "Social Security Old-Age and Survivors Insurance – Baseline Projections," March 2015, at https://www.cbo.gov/sites/default/files/cbofiles/attachments/43889-2015-03-Social_Security.pdf, p. 2, and Social Security Administration (SSA), The 2015 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, July 2015, at http://www.ssa.gov/oact/TR/2015/V_C_prog.html#96145, Table V.C1.
5.	The Bipartisan Budget Act of 2015 (BBA 2015; P.L. 114-74) was enacted on November 2, 2015. Section 601 of that act mitigates some of the increases to Medicare Part B premiums for enrollees not held harmless and the deductibles for all enrollees in 2016. On November 10, 2015, the Centers for Medicare & Medicaid Services (CMS) issued the Part B premiums for 2016 using the determination methodology prescribed in the BBA 2015. (See https://www.medicare.gov/your-medicare-costs/part-b-costs/part-b-costs.html.) Those enrollees held harmless will continue to pay the 2015 rate of $104.90 per month in 2016. Those not held harmless will pay monthly premiums of $121.80, and higher-income enrollees will pay $170.50, $243.60, $316.70, or $389.80, depending on their level of income. For more information on the impact of Medicare premiums on Social Security benefits, see CRS Report R44224, Potential Impact of No Social Security COLA on Medicare Part B Premiums in 2016, by [author name scrubbed], and CRS Report R40082, Medicare: Part B Premiums, by [author name scrubbed].
6.	See CRS Report R40611, Medicare Part D Prescription Drug Benefit, by [author name scrubbed] and [author name scrubbed] for details.
7.	Congress did not adopt COLAs for veterans' pensions in 2010 and 2011 when no Social Security COLA was paid. At the time of this writing, Congress has not adopted a COLA for veterans' pensions for 2016.
8.	In 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 benefits for inflation, see CRS Report R42000, Inflation-Indexing Elements in Federal Entitlement Programs, coordinated by [author name scrubbed].
9.	Sections 230(a), 203(f)(8), and 223(d)(4)(A), respectively, of the Social Security Act.
10.	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 2015, "Cost-of-Living Adjustment (COLA) Information for 2016" at http://www.socialsecurity.gov/cola/.