Social Security: The Cost-of-Living Adjustment in January 2003

Social Security: The Cost-of-Living Adjustment in January 2003

Order Code 94-803 EPW
Updated October 18, 2002
CRS Report for Congress
Received through the CRS Web
Social Security: The Cost-of-Living
Adjustment in January 2003
David Koitz and Geoffrey Kollmann
Updated by Gary Sidor
Domestic Social Policy Division
Summary
To compensate for the effects of inflation, Social Security recipients receive a cost-
of-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 1.4% COLA payable in January 2003 was triggered by the rise in the CPI-W
from the third quarter of 2001 to the third quarter of 2002. 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 1.4% COLA in January 2003. 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 1-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

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The January 2003 COLA
The January 2003 COLA became known on October 18, 2002, when the BLS
announced the September 2002 CPI-W figure. With release of the September 2002 index,
the two July-September sets of CPI-W figures needed to compute the COLA (one for
2001 and another for 2002) became available. Table 1 shows how the January 2003
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 2003
CPI-W Index Points
July 2001
173.8
August 2001
173.8
September 2001
174.8
Average for Third Quarter of 2001 (rounded to
the nearest one-tenth of one percent):
174.1
July 2002
176.1
August 2002
176.6
September 2002
177.0
Average for Third Quarter of 2002 (rounded to
the nearest one-tenth of one percent):
176.6
Percentage increase from the third quarter
average for 2001 to the third quarter average for
176.6 - 174.1 = 2.5
2002 (rounded to the nearest one-tenth of one
2.5 / 174.1 = 1.435%
percent as required by law):
COLA = 1.4%
Source: BLS data series for the CPI-W for 2001 and 2002.
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.
Their recipients also receive a 1.4% COLA in January 2003.1 The COLA also triggers
1 For retirees under the Federal Employees’ Retirement System (FERS), a different formula is
applied and the resulting increases may differ.

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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 $87,000 in 2003 (from $84,900 in 2002).
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 $11,520 in 2003 (up from $11,280 in
2002) 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 1938, it is 65 years and two 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 year in which a recipient reaches the FRA, an annual exempt
amount still applies for months preceding the attainment of the FRA. Under the law, the
exempt amount will be $30,720 in 2003 (up from $30,000 in 2002), 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 2003, the amount of earnings needed for a Social Security “quarter-of-
coverage” is $890 (up from $870 in 2002). The coverage threshold for domestic workers
is $1,400 (up from $1,300 in 2002), while the threshold for election workers remains
unchanged at $1,200. The monthly substantial gainful activity amount for the non-blind
disabled is $800 (up from $780 in 2002), and the amount for the blind disabled is $1,330
(up from $1,300 in 2002).
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 2003 COLA on monthly
benefit levels.

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Table 2. History of Social Security Benefit Increases
Amount of increase
Date increase was paid
(shown as a percentage)
January 2003
1.4
January 2002
2.6
January 2001
3.5
January 2000
2.5*
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
July 1977
5.9
July 1976
6.4
July 1975**
8.0
April/July 1974***
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.
*Originally computed as 2.4%, the COLA payable in January 2000 was corrected to 2.5%
under P.L. 106-554.
**Automatic COLAs began.
***Increase came in two steps.

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Table 3. Social Security and Medicare Hospital Insurance Taxable
Earnings Bases Since the Beginning of the Programs
Taxable earnings base
Year effective
OASDI
HI
2003
$87,000
All earnings
2002
84,900
All earnings
2001
80,400
All earnings
2000
76,200
All earnings
1999
72,600
All earnings
1998
68,400
All earnings
1997
65,400
All earnings
1996
62,700
All earnings
1995
61,200
All earnings
1994a
60,600
All earnings
1993
57,600
$135,000
1992
55,500
130,200
1991a
53,400
125,000
1990
51,300
51,300
1989
48,000
48,000
1988
45,000
45,000
1987
43,800
43,800
1986
42,000
42,000
1985
39,600
39,600
1984
37,800
37,800
1983
35,700
35,700
1982
32,400
32,400
1981
29,700
29,700
1980
25,900
25,900
1979
22,900
22,900
1978
17,700
17,700
1977
16,500
16,500
1976
15,300
15,300
1975
14,100
14,100
1974
13,200
13,200
1973
10,800
10,800
1972
9,000
9,000
1968-1971
7,800
7,800
1966-1967b
6,600
6,600
1959-1965
4,800
—
1955-1958
4,200
—
1951-1954
3,600
—
1937-1950
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.

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Table 4. Impact of January 2003 COLA on Monthly Benefit Levels
Before
After
1.4%
1.4%
COLA
COLA
Average Social Security monthly benefit levels:
All retired workers
$882
$895
Aged couple, both receiving benefits
$1,463
$1,483
Widowed mother and two children
$1,812
$1,838
Aged widow(er) alone
$850
$862
All disabled workers
$822
$833
Disabled worker, spouse, and one or more
children
$1,376
$1,395
SSI federal monthly payment standard:
Individual
$545
$552
Couple
$817
$829
Source: Social Security Administration, October 18, 2002.